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Service Tax - Pre-deposit - Works Contract Service - Back to back agreement with sub-contractor - Demand of service tax from principal contractor whereas work was executed by the sub-contractor under the 'back to back basis' agreements – HELD - In a construction works contract, the property used in the construction of a building/project passes from the builder to the owner of the land on which the building is constructed when the goods or materials used are incorporated in the building and that is so, even if there is no privity of contract between the contractee and the sub-contractor, since the deemed transfer of property in goods is based on the principle of accretion of property in goods - On the basis of the law declared by Supreme Court in Larsen & Tourbo Ltd [2008-VIL-30-SC], it prima facie appears that no ‘works contract service' was provided by the appellant to the Government of Andhra Pradesh since it was the sub-contractors who transferred the property in goods to the State Government by the process accretion of such goods into the property of State Government, during execution of works contract by the sub-contractors - Strong prima facie case in favour of the appellant-petitioner - Pre-deposit waived and stay granted

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CESTAT allows reversal of CENVAT credit attributable to input services used for provision of exempted services, under Rule 6(3)(ii) of Cenvat Credit Rules, 2004 (CCR), even though procedure under Rule 6(3A) stipulating exercising of such option in writing and furnishing necessary details, not followed; Assessee, a practising chartered accountant rendered both taxable and exempt service, utilised CENVAT credit and paid an amount of CENVAT credit on input services used towards exempted services before Show Cause Notice issuance; Enforcing payment at 8/6 percent of exempted service under Rule 6(3)(i) merely because of non-payment of due amount on time as per procedure prescribed in Rule 6(3A) too harsh, when it is undisputed by Revenue that assessee paid same amount which was due under Rule 6(3A); Further, allows CENVAT credit on insurance, repair and maintenance of motor vehicles issued in partners name, where expenditure incurred from firm's budget and taken into its books of accounts; Relies on Karnataka HC judgement in Adecco Flexione Workforce Solutions and sets aside penalty absent existence of element of mens rea : Mumbai Tribunal
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Karnataka HC rules on taxability of ‘software implementation’ by Infosys (assessee) for a bank, holds such activity a “mere service” through skill and human effort, and there is no right to use goods liable to VAT; Even if some software gets created during implementation, as per agreement, ownership vests automatically with the bank, assessee has no copyright / proprietary right over it; Bank has discretion / option to engage any service provider for implementation, it is not a condition for granting license transferring right to use the software; Since delivery of customized copyrighted software takes place once consideration is paid for grant of licenses and is not contingent upon completion of implementation, VAT not leviable thereto as a ‘pre-sale expense’; Hence, the entire consideration liable to service tax which has already been discharged by assessee; However, HC upholds VAT on customised banking software, whose proprietary right vests with assessee and what is granted is only license transferring right to use such copyrighted article; As regards maintenance & upgrades, HC holds the same as ‘goods’ and ‘deemed sale’ effected in course of rendition of annual technical support service by assessee, liable to VAT as works contract; Assessee rightly discharged VAT declaring self as ‘works contractor’ : Karnataka HC
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Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting. Recognizing the revenue by developer (i.e., assessee) only when the sale deeds would be registered in favour of the buyers could not be regarded to be either cash or mercantile system of accounting. This method was neither project completion method nor percentage of completion method, thus, this was not a recognized method to recognize revenue under AS-7 too.

Facts :

a) Assessee was engaged in the business of real estate activities, such as construction of residential-cum-commercial project, developing of plots, etc. It had completed development work of plots on 31.3.2009, but it did not show the sale proceeds in the profit and loss account even after receiving 70-80% of the sale proceeds.

b) The Assessing Officer ('AO') was of the view that development had already been completed, therefore, he re-computed the profit relating to these projects.

c) Assessee contended that he was following project completion method as per AS-7 and it was showing the sales when the registration of the sale deed would be carried out.

d) On appeal, the CIT(A) deleted the additions on the ground that the AO had changed the profit recognition method from project completion to percentage completion. The aggrieved revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

1) The CIT(A) had agreed with assessee's contention that he was following the project completion method but assessee was not recognizing the revenue on the basis of the project completion method.

2) Registration of the sale deed represents only the transfer of the title in favour of the buyer once development work on the plots had been completed.

3) Assessee was recognizing the revenue only when the sale deeds would be registered in favour of the buyers. Under AS-7 this was not a recognized method of recognizing the revenue. This method of revenue recognition followed by assessee was neither project completion method nor percentage of completion method.

4) Section 145 makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. This method of recognizing the revenue when the sale deeds would be registered in favour of the buyers could not be regarded as either cash or mercantile system of accounting.

5) Thus, the method adopted by the assessee was not in compliance with the ingredients as laid down under Section 145. Consequently, the order of AO was to be restored – ACIT. v. Alcon Developers (2015) 54taxmann.com 54 (Panaji - Trib.)

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West Bengal Value Added Tax Act, 2003 – Work Contracts – Assessee entered into three separate contract agreements with DVC wherein the first contract relates to the supply including design, engineering, manufacturing, inspection, testing and packing of a plant and equipments including mandatory spares of the main plant as Turn Key Package from abroad, the second one also relates to supply contract inclusive of the above of Indian origin and the third contract is restricted to a service. All the aforesaid contracts were agreed under a Turn Key Package for commissioning and setting up of the Thermal Power Project - Assessment - Imposition of VAT on inter-State Sale or import of the goods treating the three separate contracts to be composite one - power to bring the sale of the goods effected in course of inter–State sale or by import within the purview of the West Bengal VAT Act - Forty-sixth Amendment – HELD - It is settled that State cannot by legislature imposed Sales Tax of the inter-State sale or the sale by import in relation to a works contract provided the same is used in commissioning of the project on turnkey basis in the same form without changing its character through a manufacturing process. The power of the state to legislate on imposition of Sales Tax in relation to the works contract is not unfettered but a restrictive one. After the Forty-sixth amendment in the Constitution, the works contract is capable of being divorced into a supply and the labour and service. It is not a universal rule that if the works contract is on the turn key basis, it imbibed inseparation and indivisible but depends upon the construction of the contracts and the intention of the parties to be gathered therefrom. The Deputy Commissioner has simply proceeded on the basis that though the separate contracts are entered into between the parties but they are on a turn key basis, it partakes the character of indivisible and inseparable works contract exigible to the State Sales Tax. There is no finding recorded in the impugned order on the nature of the transaction reflected in the books maintained by the petitioner and the return filed in this regard - Since the same required a voluminous documents to be looked into which this Court has no occasion to look into it, it is not possible to ascertain whether the sale of transfer of property in goods in connection with the Inter State Sale or by import can be segregated and the said authorities is incompetent to levy tax under the State Legislation - This Court, therefore, feels that it would be proper that the Deputy Commissioner should relook the judgment in the light of the law enunciated above and to record his findings and the reasons in relation thereto - The order impugned is thus set aside - The matter is relegated back to the Deputy Commissioner for reconsideration
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The concept of Goods and Service Tax in India was first introduced by Mr. P. Chidambaram in his Budget speech of 2006 and at that time the date of introduction of GST was declared as 1sr. April 2010 but this date was postponed from year to year for one or another reason. Now the present government has shown very serious concern on GST and declared a new date of introduction of GST. Let us see how realistic is this date and why I am saying that it is not practically possible to introduce GST on 1st April 2016.

The constitutional amendment to give right to central Government to tax the sale of Goods and state to tax services is the prerequisite for introduction of GST because at present Central Government has the right to tax the Goods up to manufacturing state and further states have no right to tax services. This constitutional amendment will require to be passed by both the houses of parliament by majority of at least half of the members of total strength of each house and by at least two third number of members present for voting. Further this constitutional amendment has to be ratified by at least half of the state assemblies. This ratification by states is required before sending the constitutional amendment for the assent of the president of India.

At present the Government has got the GST constitutional amendment Bill cleared from the lower house (Lok Sabha) only where the Ruling party and its partners have comfortable majority. The Bill has to be cleared from upper house (Rajya Sabha) and then from at 50% of the states and that will not be an easy task and also it will take its own time. One more thing the GST constitutional amendment can be carried on by ratification of 50% of the states and if it is cleared only by 50% or say 60% of the sates but rejected by others then it will be perfect for the GST constitutional amendment but how the centre will take the dissenting states in GST net for actual introduction of the GST will be a big question because GST has to be introduced in throughout nation simultaneously unlike VAT which was introduced first by some states and followed by others in next year or years.

After this constitutional amendment the central and the states have to prepare respective GST Acts, Rules and forms and still they have not released any draft for the same and this is the indication that the process of forming these essentials of GST have not been started yet and this process will also take its own time. Since inception of concept of GST in 2006 it has turned into a “struggle of right to tax†between States and Centre and States have always their own issues and apprehensions on GST and still there are some vital issues which are not finally settled between States and the Centre. The rate of tax (combined rate 26 or 27% is too high), keeping in or out petroleum products and liquor from the GST, covering the entry tax under GST or not and Number years of compensation to States on revenue losses from GST are still unresolved issues between the Centre and the States and certainly GST finally can only be introduced in India after final resolution of these issues. These issues are under discussion since 2006 and will also take more time and hence one year is not sufficient to resolve all these issues. The declared date 1st April 2016 is very near and only one year and two months are left in it hence this is not a realistic date.

We should take 1st April 2017 as the practically probable date for introduction of GST in India.
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Supreme Court Larger Bench: Karnataka Sales Tax Act, 1957 - Entry 25 of Schedule VI to the Act - Processing and supplying of photographs - Transfer of goods – Work Contract – Power of State to segregate the goods part of the Works Contract and impose sales tax thereupon - Retrospectivity of tax provision – HELD - After insertion of clause 29-A in Article 366, the Works Contract which was indivisible one by legal fiction, altered into a contract, is permitted to be bifurcated into two: one for "sale of goods" and other for "services", thereby making goods component of the contract exigible to sales tax. Further, while going into this exercise of divisibility, dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause 29-A of Article 366, the State Legislature is now empowered to segregate the goods part of the Works Contract and impose sales tax thereupon. It may be noted that Entry 54, List II of the Constitution of India empowers the State Legislature to enact a law taxing sale of goods. Sales tax, being a subject-matter into the State List, the State Legislature has the competency to legislate over the subject - Keeping in mind the aforesaid principle of law, the obvious conclusion would be that Entry 25 of Schedule VI to the Act which makes that part of processing and supplying of photographs, photo prints and photo negatives, which have "goods" component exigible to sales tax is constitutionally valid - Assessees/respondents, made vehement plea to the effect that the processing of photographs etc. was essentially a service, wherein the cost of paper, chemical or other material used in processing and developing photographs, photo prints etc. was negligible. This argument, however, is founded on dominant intention theory which has been repeatedly rejected by this Court as no more valid in view of 46th Amendment to the Constitution – Retrospectivity of provision - The very basis on which Entry 25 of Schedule VI was declared as unconstitutional, has been found to be erroneous. In such circumstances, the legislature will be justified in enacting the law from the date when such a law was passed originally and that date is 01.07.1989 in the instant case - It is well settled that subject to Constitutional restrictions a power to legislate includes a power to legislate prospectively as well as retrospectively. In this regard legislative power to impose tax also includes within itself the power to tax retrospectively - The High Court did not even deal with various facets of the issue in their correct perspective - The impugned judgment of the High Court is accordingly set aside, the present appeal is allowed and as a result thereof, the writ petitions filed by the respondents in the High Court are dismissed holding that Entry 25 of Schedule VI of the Act is constitutionally valid – Revenue appeal allowed

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Service Tax – Work Contract – Disallowance of Composition Scheme for works contract service in respect of the composite contracts executed with effect from 1.6.2007 on the ground of that projects were ongoing contracts – Denial of benefit of 67% abatement under Notification No. 1/2006-ST on the ground that assessee had taken Cenvat credit of input services – HELD - The classification of service is to be determined in terms of the nature of service rendered vis-a-vis the definition of various services as applicable on the date of rendition of service. The Boards circular dated 4.1.2008 is in disharmony with law to the extent it holds that with effect from 1.6.2007 the classification cannot be changed for ongoing projects even if the service rendered is more specifically covered there under. Thus even if the classification of service prior to 1.6.2007 in respect of ongoing contracts was under CICS/CCS, the same would be classifiable as works contract service (WCS) with effect from 1.6.2007 if the service rendered was more specifically covered there under and if the classification is held to be under WCS the benefit of Notification No. 1/2006-ST would not be applicable with effect from 1.6.2007 as the said notification is not applicable to works contract service. However, the benefit of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 or any other applicable notification can be claimed by the appellants subject to producing the required evidence - As regards denial of the benefit of abatement under Notification No. 1/2006-ST on the ground that the appellants had taken Cenvat credit in respect of input services, it is to be pointed out that the said notification does not debar availment of Cenvat credit on input services – Matter remanded

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Jharkhand Value Added Tax Act, 2005 - ex parte order of assessment – Method of service of notice in case of high value case – Limitation - Violation of fundamental right of the assessee - HELD - It ought to be kept in mind by the State that when the State is imposing such a huge liability of tax of approximately Rs. 90 Lakhs, more care should have been taken by the State to the notice upon the petitioner or upon the assessee. Not only orthodox methods of service of notice should have been followed, but, over and above the orthodox methods, the State should have served the notice upon assessee by sending any employee of the State. The State has several vehicles and persons with them. When such a huge liability of tax is imposed or is going to be imposed, the State should have served the notice upon the assessee by sending any responsible employee instead of passing exparte order. When there is more liability of amount of tax, more care should have been taken by the State, at least in following the procedure. Always exparte orders have inbuilt difficulties because correct facts along with correct documents are not available with the assessing office - The provision of sub-section 2 of Section 42 is also applicable whenever any order is passed in writ petition under Article 226 of the Constitution of India, mainly for the reason that there is an exparte assessment order without giving any opportunity of being heard to the assessee and once there is a violation of principles of natural justice, the impugned order will be arbitrary and once there is arbitrariness in passing of the order, the said order is always violative of right of equality vested in the petitioner under Article 14 of the Constitution of India. Thus, the impugned order is violative of fundamental right guaranteed to the petitioner – Matter is remanded to CTO to decide afresh the tax liability, if any, of the petitioner. The relaxation of the time limit as mentioned in Subsection 2 of Section 42 which is applicable in the case of appellate order or revisional order, is also applicable whenever any order is passed in the writ petition under Article 226 of the Constitution of India. Hence, there is no question of limitation whatsoever arises in this case, if the assessing officer is deciding within the time limit, as stated in sub-section 2 of Section 42 of the Act

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I Actual Labour deduction Method:-

For the definition of labour we refer to one of the Landmark Judgements of Gannon Dunkerley And Co. And Ors. vs State Of Rajasthan And Ors. on 17 November, 1992. which considers following expenses for eligibility of claim of deduction:-

Analysis of prescribed deductions:-

a) Labour charges for execution of Works Contract: The value consists of mobilisation of men and material and establishment of site office etc. As these are preliminary expenses not involving value goods cannot be subjected to tax.

b) Amount paid to sub-contractor for labour and services: Value relatable to sub-contractors turnover where sub-contractor is engaged only for labour and services not involving supply of goods, deduction is available only for amt paid to registered sub-contractor if contract involves usage of material.

c) Charges for planning, designing & Architect’s fees: Value for planning, designing and architects fees relating to construction of building or plant. As the expenses are in the nature of services, hence eligible for deduction

d) Charges for acquiring machines, tools etc. on hire or otherwise These goods are either taken on hire or purchased as assets for use in the process of execution of works contract. However, since the goods are neither incorporated in works contract nor sold to the customer, there is no transfer of property in them and hence excluded for the levy of VAT. Claim of Depreciation on Plant and Machinery is debatable, however allowed in the case of L&T - 34 VST 53.

e) Cost of consumable in which property does not pass to contractee These are the items such as water, electricity, fuel, lubricating oils, electrodes etc, which are getting consumed in the process of execution of works contract and hence the property therein is not transferred to the contractee and hence are excluded for the purpose of levy of tax.

f) Cost of establishment relating to supply of labour and services This cost is relatable to facility given to labor such accommodation and other facilities to make them available at job site for purpose of carrying out labour and rendering of services in connection with execution of works contract.

g) Other expenses relating to supply of labour and services These are expenses in the nature of overheads, rent, salary, electricity, telephone charges expended relating to works contract job.

h) Profit of contractor relating to labour & services This is the profit earned by the contractor over the cost of labour and services expended by him i.e. difference between the value recovered from the employer and the cost incurred by the contractor.

Another area of confusion which exists is allowability of office overheads like rent, electricity, office expenses, interest etc. As per the Para 45 of the judgement the words used for such expenses were as follows :-

“These relate to the various expenses which form part of the cost of establishment of the contractor. Ordinarily the cost of establishment is included in the sale price charged by a dealer from the customer for the goods sold. Since a composite works contract involves supply of materials as well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods.

Similar apportionment will have to be made in respect of profits. The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded.”

Thus as per above even office overheads need to be considered for the purpose of taking deductions under the above method, however proportionately.

Thus all expenses that fit the classification as above are permissible to be claimed for determining the taxable turnover under VAT.
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