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Consult Construction

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Proof of actual service tax collection, a condition 'precedent' before passing tax demand order u/s 73A of Finance Act; Tribunal rejects Adjudicating Authority's inference that assessee collected service tax from customer based on contract which stated that service tax element if payable was extra; Liability to remit service tax cannot arise merely on basis of agreement that service-recipient would compensate / reimburse service provider in case of no liability; Sec 73A(4) specifically enjoins passing of order only after considering the representation by noticee and determination of amount due thereafter  : Delhi Tribunal

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M/s Essar Projects Ltd Vs CCE & ST

ST - Works Contract Composition Scheme - There is no explanation in Rule 3 to clarify that payment of ST shall also mean the situation where ST was payable but not paid by the assessee - it will not be correct to hold that intention behind the scheme should be seen when no such intention is coming out of the legal provisions - Appeal allowed: CESTAT - Appeal allowed : AHMEDABAD CESTAT

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Development of land owned by Housing Corporation for township neither taxable as ‘construction of complex service’ nor ‘works contract’; Construction of roads, laying of sewer lines, landscaping alongwith plantation and construction of boundary wall not covered either u/s 65(105)(zzzh) r/w Sec 65(30a) and Sec 65(91a) or u/s 65(105)(zzzza) of Finance Act; Noting that construction of residential complex undertaken by other contractors, sets aside service tax demand with interest and penalties u/s 76 and 78  : Delhi Tribunal

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  • Smithe124
    Smithe124 says #
    I truly appreciate this article.Really thank you! Fantastic. kceecffgdkdgeaee
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CESTAT allows re-classification of residential apartment construction activity as ‘works contract service’ after its introduction w.e.f. June 2007; Where any activity involving construction of new building / complex falls within ambit of Sec 65(105)(zzzza), it would necessarily be classified as ‘works contract service’, irrespective of prior classification; Adjudicating Authority’s conclusion that re-classification not allowable since assessee discharged tax under ‘construction of residential complex service’ category, fundamentally flawed; Obligation to classify activity under appropriate taxable category non-derogable, cannot be abdicated on assumption that registration conclusive of classification; Further, relies on Delhi HC's G.D. Builders ratio to exclude consideration received towards sale of immovable property from gross amount of service  : Bangalore Tribunal

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Article Series – New found Taxability of Builders / Developers

- Well, works contract is a topic which has now got a new meaning and definition. Recently Honourable Apex court in a recent judgement in the case of L&T has held that the construction of residential complex by developers is a works contract.

- The constitutional amendment of 1982 got a new meaning in a way that the words "in some other form" from the phrase - transfer of property (as goods or in some other form) could even be in the form of an immovable property. Not only that the court has held that point of transfer of property in goods need not necessarily be by way of accretion but after some time in the form of an immovable property.

- Thus trying to close out all ways in which the builders could have escaped from calling themselves as contractors. Interestingly since the court has termed them as contractors, those who are doing the actual construction on their behalf have become sub-contractors. And thus despite the fact that the VAT pill may be tough to digest for the builder community, they are left with very less options but to plan the future transactions. Some may even try and avail the C Form benefit, now that the end product has been held to be taxable under VAT.

- The problem now is that the rational builders may now try to fully comply with the new law (which is applicable retrospectively), but the past would continue to haunt them. Hence any new compliances may have to be done by creating a new entity.

- Some ways in which the future transactions could be structured are as below :-

  1. Sell of the lands to a new entity and engage in proper compliances in the new entity. Although this mode would entail additional costs in terms of stamp duty payable on transfer of land.
  2. Enter into a Joint Development Agreement with a contractor and thus all future construction would be undertaken by this contractor.
  3. Create a back to back entity and offload the complete contracting work to the new entity including purchase of  materials and labour.
  4. Sell the lands to the prospective customers and let them appoint the contractor on their own. This could require them to get their plans passed independently.

- Each of these options has its own merits and demerits and the implications arising out of each option needs to be studied carefully not only from a tax point of view, but also control and legal point of view.

- The analysis should take into account the complete impact of taxation including stamp duty, Income Tax, VAT and Service Tax. It should also take into account the fact that there are various schemes under indirect taxes under which the tax liability may be discharged by the real estate developer as well as the contractors working under him. Thus theoretically there could be several models which would emerge out of this.

- We would thus advice that proper professional help should be taken before making any decision in this regard.

Recent Comments - Show all comments
  • Srinivas M
    Srinivas M says #
    Hi, I booked a flat in Hyderabad and paid some amount against each milestone they have laid. They have collected the service taxe
  • Consult Construction
    Consult Construction says #
    In case of continuous service where milestones are fixed, the applicable rate for the amount paid on completion of such milestone
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Sales Tax/VAT - accepting defective compressors outside the warranty period with certain fixed repair charges and replacing them at the option of the customer with any other repaired compressor does not tantamount to sale so as to attract Sales tax: High Court [para 10, 11, 12, 14, 16]

High Court observations -

++ In order to constitute a sale, it is necessary that; (i) there has to be a transfer of title to the goods which is supported by monetary consideration; and (ii) the words 'valuable consideration' take colour from the preceding expression 'cash or deferred payment' which would mean some other monetary payment in the nature of cash or deferred payment.

++ In the present case, we find that there is no sale at all.

++ compressor and therefore, there was no consensual agreement of sale supported by price or other monetary consideration. We are in full agreement with the findings of the MSTT on this aspect. What is paid is only the repair charges and not the price for purchasing the repaired compressor. This is clear from the fact that even if the customer opted not to take a repaired compressor off the shelf of the Respondent, it would still have to pay the same repair charges for repairing its own compressor and wait for 60 days to receive the same from the Respondent, after repairs. This puts it beyond the realm of doubt that what is charged to the customer by the Respondent is only repair charges and not a price for the sale of the repaired compressor.

Application dismissed

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HC dismisses Revenue appeal, appropriate tax rate for works contract service would be rate prevalent at time of service rendition, not receipt of consideration; Rejects Revenue’s contention that by virtue of CBEC Instruction dated April 28, 2008, assessee liable to pay composite tax at revised rate of 4% instead of 2% since payment received post March 1, 2008; Foundation of Revenue’s argument incorrect since said Instruction held invalid by HC in Vistar Construction case; Moreover, disallows Revenue to raise plea that Vistar Construction case distinguishable since it failed to consider Rule 3 of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007; Absent any allegation in show cause notice or argument before lower appellate authority, Revenue cannot take such plea for first time at HC stage  : Delhi HC

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Build Own Operate Transfer contract is a works contract:

The Andhra Pradesh High
Court has held that a contract for imparting computer education in schools including leasing of computer hardware, software and connected accessories on Build Own Operate Transfer (BOOT) basis is a works contract. The question before the court was whether the contract was purely a service contract or a works contract.The petitioner here contended that although the petitioner provided computers and software for teaching purposes, the same was purely incidental to the service contract and that the computers and software installed remained the property of the petitioner till the ownership is transferred at the end of 5 years. The court however relying upon the Supreme Court judgment in the case of Larsen & Toubro Ltd. [2013-VIL-03-SC-LB] held that the contract in question involves both a contract of service and a contract of sale of goods.It was held that that contract is a composite contract and according to legal fiction provided under Article 366(29-A)(b) of the Constitution of India, it is permissible to separate the transfer of property in goods from the contract of service. The court hence held the contract in question to be works contract observing further that mere fact that the ownership of the computers and the accessories was passed on to goverend of the contract does not alter the naturthe contract. [ NIIT Ltd. – 2014-VIL-109-AP]
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Contract for supply and installation of lifts is Works Contract:
The Constitution Bench of the Supreme Court has held that “the dominant nature test”, “overwhelming component test”and “the degree of labour and service test”are not applicable in case of works contracts falling under clause (29A)(b) of Article 366 of the Constitution of India and that the principles stated in Larsen and Toubro v.  State of Karnataka[(2014) 1 SCC 708], correctly enunciate the legal position in this regard. The reasoning of incidental facet of labour and service in case of contract for supply and installation of the lift was held to be incorrect by the Apex Court while it overruled its three-judge Bench Order in the case of Kone Elevators (India) Ltd. [(2005) 3 SCC 389] which had held that the contract for supply and installation of lift to be a sale simpliciter, as the skill and labour employed for converting the main components into the end product was only incidental. The court in this regard noted that if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if a separate contract is entered into for installation, it would be a contract for labour and service. It was held that the composite contract for supply and installation has to be treated as a works contract, as it is not a sale of goods simpliciter. [Kone Elevator India Pvt. Ltd. v.  State of Tamil Nadu – Writ Petition (C) No. 232/2005, decided on 6-5-2014, Supreme Court Constitution Bench]

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Posted by on in VAT

Good used in rendering service not part of gross amount if VAT paid separately:
The appellants were engaged in the business of manufacture as well as repair of transformers which involved replacement of certain components like HV/LV coils and also the used transformer oil for filling. The invoices showed separately the service charges on which service tax was discharged and the value of the transformers oil and other consumables and of the components parts replaced, on which sales tax/VAT was discharged. The tribunal did not agree with the department that service tax was to be paid on the gross amount.
[Samtech Industries v.  Commissioner – 2014-TIOL-643-CESTAT-DEL]

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We are Ahmedabad based professional consulting firm. We are providing various services to Construction, Real Estate and Project Companies in various areas like Indirect Taxation – Service Tax & Multi state VAT consultancy, ERP implementation, Site & Management audit, Designing Tender & other related contractual documents etc.