1. SERVICE TAX FROM BUILDER’S PRESPECTIVE

2. OBJECTIVE
Availing advantage by adopting legal measures of tax planning.
To make cost of goods or services as competitive as possible.
To be burdened only by minimum levy of tax.
Business could be strategically planed to pay the correct amount of service tax.
To create legal awareness for in-depth examination.

3. Why Planning In Regime Of Service Tax Credit ?
Duty of the citizen to charge and pay correct amount of service tax.
Nothing less – Nothing more.
Law does not permit to charge more than the due tax.
Law also requires to pay just and right amount of tax.

4. SPECIFIC STRATEGIC PLANNING BY BUILDER’S IN RESPECT OF IMPORTANT CATEGORIES OF TAXABLE SERVICES

5. Taxable Services as relevant to the Builders
Commercial or Industrial Construction.
Construction of Complex.
Consulting Engineer.
Dredging.
Erection, Commissioning or Installation.
Interior Decorators.
Management, Maintenance or Repair.
Site Formation and Clearance, Excavation and Earth Moving and Demolition.
Works Contract Service as recently introduced from

6. Classification Of Service
Wide scope of strategic planning in classification of taxable service.
A service beyond the scope of classified service is not taxable.
The use of word ‘include’ restricts the generally broader sense of classified service.
Service Tax Law only provides Rule of Classification of taxable service where such service is prima-facie classifiable in two or more categories.

7. Self Supply of Services
If, a builder, promoter, developer or any such person undertakes construction work on his own without engaging the services of any other person, then there is no incidence of service tax on such builder etc. In such circumstances, the relationship of service provider and service recipient does not exist. It is in the nature of Self Supply of Services. This issue has been recently clarified by Reference Code No of Circular No. 96/6/2007-ST dt 23rd Aug 2007.

8. SERVICE RENDERED
To Qualify a Service under Taxable Category, it must be rendered to such 8 broad types of persons as specified under Service Tax Act.
Service tax liability exists only when service is provided to the ultimate client/ customers/subscribers, where such words are used in the definition.
Relationship between the service provider and the receiver should be of specified type to make the service taxable.

9. Services Provider Receiver
Construction Services
Commercial Concern
Any Person
Consulting Engineer
Professionally Qualified Engineer or Engineering Firm
Client
Transport of Goods By Road
Customer
Steamer Agents Service
Shipping Line
General Insurance Services
Person Carrying on General Insurance Business
Policyholder

10. ‘Any Person’
Since the word ‘person’ has not been specifically defined for the purposes of Service Tax, resort can be had to the definition under the General Clauses Act.
Under Section 3(42) of General Clauses Act, ‘person’ shall include any company or association or body of individuals, whether incorporated or not.
In Salmond’s jurisprudence, it has been stated as follows:
‘So far as legal theory is concerned, a person is any being whom the law regards as capable of rights and duties. Any being that is so capable is a person whether a human being or not, and no being that is not so capable is a person, even though he be a man’.

11. CLIENT vs. CUSTOMER
The word ‘Client’ and ‘Customer’ not defined. Since they are used distinctively they should be construed differently
The client refers to services which are tailor made and designed / created under specific given circumstances.
The customer refers to services which are standard and repetitive in nature.

12. DICTIONARY MEANING OF ‘CUSTOMER’
‘One who regularly or repeatedly makes purchases of, or has business dealings with a tradesman or business. Ordinarily one who has repeated business dealings with another; a buyer, purchaser, consumer or person’
(Black’s Law Dictionary).
‘A person with whom a business house or a businessman has regular or repeated dealings; a purchaser of goods, one who frequents any place of sale for the sake of purchasing or ordering goods. A business ‘customer’ is one who has the use and habit of resorting to the same person or place to do business’ (Law Lexicon by P. RamanathaIyer)

13. CLIENT vs. CUSTOMER
Wherever the word ‘client’ or ‘customer’ is used in the category of taxable service, it leads to the creation of liability of service tax at the last point.
Service between the two persons of same category of service providers with an aim to provide ultimate service to a client or customer is not taxable.

14. Strategic Planning – Status & Relationship
Relationship between a customer and service provider must be of agency.
A turnkey contractor provide the service as an independent contractor without interference and control of the owner as to how the contract has to be performed or executed.
There is a complete absence of relationship of agency .

15. Strategic Planning – Agent & Servant
Supreme Court have determined the difference between the relationship of master and servant and of principal and agent.
A principal has a right to direct what work the agent has to do.
A master has a further right to direct not only what work but how the work is to be performed.

16. Strategic Planning - Independent Contractor & Agent
Independent Contractor is entirely independent of any control or interference.
Independent Contractor merely undertakes to produce a specified result, enjoying his own means to produce that result.
An agent is bound to exercise his authority for all lawful instructions of his principal.
Agent is not subject to direct control or supervision of his principal.

17. MEANING OF ‘IN RELATION TO’
Equivalent to or Synonymous of ‘concerning with’ or ‘pertaining to’, and as words of comprehensiveness which might not have a direct significance as well as indirect significance depending on the context .
Any service which has a direct or indirect connection with a specified service has to be treated as ‘in-relation to’ that specified services.
The definition has to be interpreted, in a sense appropriate to the phrase defined and to the general purpose of the enactment.

18. IN-DEPTH ANALYSIS OF CONTRACT OR AGREEMENT
WORKS CONTRACT
IN-DEPTH ANALYSIS OF CONTRACT OR AGREEMENT

19. ANALYSIS OF TURNKEY OR SERVICE CONTRACT
Contract has to be read as a whole, it cannot be bifurcated or partitioned.
Transfer of goods involved in execution of turn key contract or composite works contract are taxed as sale of goods.
It is not legally correct to tax one portion of gross receipt for one nature of taxable service while taxing the same service provider under a different category of service for another portion of gross receipt of same contract.

20. ANALYSIS OF CONTRACT
Executory Contracts have primary aim of execution through use of labour.
No consultancy or advise is required in Executory Contracts. Neither any technical assistance is rendered.
Annual Maintenance Contract undertaken and executed by Engineer or Consulting Engineer are not service of consulting.

21. MUTUALLY EXCLUSIVE
It is a settled law that service tax can be imposed only on the service portion of a Composite Contract.
No Service tax on the transfer of property in goods which is separately taxable under VAT/Sales Tax by the respective States.
‘Taxing entries must be constructed with clarity and precision so as to maintain such exclusively, and a construction of a taxation entry which may lead to overlapping must be eschewed.

22. LANDMARK JUDGMENT
The landmark judgment of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd.Vs. Union of India (2006) 145 STC 91 puts the controversy at rest.
The Central Excise and Service Tax Appellate Tribunals in the cases of Shilpa Colour Lab Vs Com. (2007) 8VST 554 and Adlabs Vs. Com. (2006) 2STR 121 have held that if in providing the services certain goods and materials are consumed, the value of those goods and materials cannot be included in the value of services for levy of service tax.

23. CALCULATION OF TAXABLE TURNOVER FOR SERVICE
BUILDER’S SERVICE
CALCULATION OF TAXABLE TURNOVER FOR SERVICE

24. DISCRIMINATION IN VALUATION
For the Service Providers under the category of “Commercial or Industrial Construction Service” or “Construction of Complex Service” or “Erection, Commissioning or Installation Service”
Such Services are also usually performed as a Composite Contract, but no specific provision for valuation of such service has been envisaged in the Service Tax (Determination of Value) Rules, 06.

25. Valuation Rule 2-A must apply to all Composite Contracts in all Category of Services
The Government have recognized the settled law for levying service tax on the service of Works Contract by providing Valuation Rule 2-A, but have forgot to apply the same settled principle of law under the other categories of service which are also performed under a composite contract wherein the property in goods is also transferred alongwith the services.
Similar deductions should be allowed otherwise this will not only be discrimination, but also against the provisions of the settled law.

26. CENVAT Credit
The gross value charged by the building or civil contractors include the material cost, namely the cost of cement, steel, fittings and fixtures, tiles etc. Under the CENVAT Credit Rules 2004 the service provider can take credit of input liability of Excise Duty paid on such inputs from its output liability of service tax.
CENVAT CREDIT not allowed under optional Abatement Scheme.

27. OPTIONAL ABATEMENT/ALTERNATIVE TAX
Relief in calculation of Service Tax Noti. 1/2006.
Abatement of 67% of the GROSS AMOUNT CHARGED is allowed for cost of supplying/using goods.
Service providers who are only providing completion and finishing services are not eligible for abatement.
No credit under CENVAT Rules of Excise Duty paid on input goods and capital goods as well as service tax on input services shall be available.
The benefit under Not. No. 12/2003 ST for exemption toward cost of goods is not available.

28. WORKS CONTRACT
IN-DEPTH ANALYSIS OF IMPACT OF The Hon’ble Supreme Court’s Decision in M/s K. Raheja Development Corpn. Vs State of Karnataka (2005) 141 STC 298

29. PRO ACTIVE MEASURES INITIATED BY DGST AGAINST ESTATE BUILDERS
The Director General Service Tax has issued a Circular No. V/DGST/22/ AUDIT dated initiating pro-active measures against the Estate Builders involved in the service of ‘Construction of Complex Service’ taking rescue of some observations in specific circumstances in the case of M/s K. Raheja Development Corpn. Vs. State of Karnataka (2005) 141 STC 298.

30. Hon’ble Supreme Court’s Decision on the basis of typical contract document
The Hon’ble Supreme Court on the basis of typical contract document between the prospective buyer and the builder in M/s K. Raheja Development Corpn. Vs State of Karnataka (2005) 141 STC 298 have observed
“that the activities undertaken by builders for construction of flats/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under works contract and not under sale”.

31. Hon’ble Supreme Court’s Decision on the basis of typical contract document
It was also observed by Hon’ble Supreme Court of India that the definition of the ‘works contract’ is very wide and it is not restricted to a works contract commonly understood and even if the owner of the property enters into an agreement to construct flats and building on behalf of anybody else it shall be treated as works contract and the owner shall be liable to pay the tax.

32. REPRESSING CIRCULAR OF DGST ULTIMATELY WITHDRAWN
After going into all the aspects of the DGST Circular dated it has been ultimately withdrawn vide recent Circular No. 96 / 7 / 207-ST dated 23rd August 2007.
So, the pro-active measures against the Estate Builders initiated by the Service Tax Department on this issue should be taken back.

33. Hon’ble Allahabad High Court in M/s Assotech Reality Pvt. Ltd Vs
Hon’ble Allahabad High Court in M/s Assotech Reality Pvt. Ltd Vs. State of U.P. (2007) 8 VST 738 after detailed examination of various clauses of the agreement between the prospective buyer and the builder as referred in Para 19, 21 and 27 of the Order have decided that
‘the construction undertaken by the petitioner could not be said to have been undertaken by it for and on behalf of the prospective allottees/
purchasers, but otherwise. Thus, the construction in question would not fall under clause (m) of Section 2 read with Section 3F of the Act’.

34. WORKS CONTRACT SERVICE

35. Taxable Services as relevant to the Builders
Commercial or Industrial Construction from September
Construction of Complex from
Consulting Engineer.
Dredging.
Erection, Commissioning or Installation.
Interior Decorators.
Management, Maintenance or Repair.
Site Formation and Clearance, Excavation and Earth Moving and Demolition.
Works Contract Service as recently introduced from

36. ‘Works Contract’ under Service Tax
The Finance Act 2007 has sought to levy service tax w.e.f for the first time on certain specified ‘Works Contract’. The Finance Minister observed as follows:-
“State Governments levy a tax on the transfer of property in goods involved in the execution of a works contract. The value of services in a works contract should attract service tax. Hence I propose to levy service tax on services involved in the execution of a works contract. However, I also propose an optional composition scheme under which service tax will be levied at only 2 per cent of the total value of the works contract”.

37. THE BACKGROUND FOR THE LEVY ON WORKS CONTRACT
It is well settled that a ‘work contract’ cannot be vivisected and thus part of it cannot subjected to tax.
The attempt of department to levy service tax on the service portion of the works contract did not materialize.
It appears that this new service of ‘Works Contract’ has been introduced in order to overcome the effect of the court decisions, so as to tax the service element in the specified composite works contracts.

38. WHAT IS THE ‘TAXABLE SERVICE’-WORKS CONTRACT
“to any person,
by any other person
in relation to the execution of a works contract,
excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams”.

39. ‘Works Contract’
means a contract wherein ,-
transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
such contract is for the purpose of carrying out,-
-erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbering, drains laying or

40. Contd….
other installation for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduct, primarily for the purposes of commerce or industry; or

41. (c) construction of a new residential complex or a part thereof ; of
Contd….
(c) construction of a new residential complex or a part thereof ; of
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to
(b) and (c) or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects”.

42. SERVICES SEPERATELY TAXED AS AN INDEPENDENT CLASSIFICATION
ERECTION, COMMISSIONING OR INSTALLATION- The items listed in clause (a) are the same as those listed in the definition of ‘erection, commissioning or installation services’ given in clause 65(39a).
CONSTRUCTION SERVICES – The definition of services given in clauses (b), (c) and (d) are identical with the definition of services given in Section 65 (25b) for ‘commercial or industrial constructions services’ or ‘construction of complex services’ given in clause 65 (30a).
It is not clear from clause (ii) (c) of the Explanation as to whether the meaning assigned to residential complex in clause 65 (91a) will be applicable to this definition also.

43. OUTSOURCING A PART OF WORK BY ENGAGING A SUB-CONTRCTOR
The main contractor who owns the liability of service tax may engage another sub-contractor which is also a service provider for works contract.
As per Ref Code No of the Circular No. 96/6/2007–ST dated 23rd August 2007 the sub-contractor has also been put in his capacity as service provider liable for service tax for the services which may be input services for the main contractor.
It is important to note that CENVAT Credit of the service tax paid by the sub-contractor is available, if he does not opt for the composition scheme.

44. DETERMINATION OF VALUATION OF SERVICE IN ‘WORKS CONTRACT’
Rule 2A of the Valuation Rules provides that the value of taxable service in relation to services involved in the execution of a works contract :
Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.
It may be noted that –
gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract ;

45. Contd… (i) labour charges for execution of the works ;
value of works contract service shall include,-
(i) labour charges for execution of the works ;
(ii) amount paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architect’s fees ;
charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract ;

46. other similar expenses relatable to supply of labour and services; and
Contd…
cost of consumables such as water, electricity, fuel, used in the execution of the works contract;
cost of establishment of the contractor relatable to supply of labour and services ;
other similar expenses relatable to supply of labour and services; and
profit earned by the service provider relatable to supply of labour and services ;

47. Contd….
(2) Where Value Added Tax or Sales Tax, as the case may be, has been paid on the actual value of the transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under 1 above

48. VALUATION OF WORKS CONTRACT FOR VAT/SALS TAX
VAT/Sales Tax and service tax are complimentary to each other in case of ‘works contract’, basic concepts of valuation of works contract for Sales Tax/VAT are relevant to understand the principles of valuation of Service Tax.
In Bharat Sanchar Nigam Ltd. v. UOI (2005) STT-0245 (SC), it has been clearly held that value of service cannot be included in price of goods. Conclusion (E) of the judgment (Para 81 of STT) reads as follows. “The aspect theory would not apply to enable the value of service to be included in the sale of goods or the price of goods in the value of service”.
In Builders Associations of India v. UOI (1989) 73 STC (SC), it was held that sales tax cannot be imposed on full value of contract. The Tax is on ‘transfer of property in goods involved in execution of works contract’. Thus, Sales Tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.

49. DEDUCTIONS PERMISSIBLE - ‘VALUE’ FOR PURPOSE OF SERVICE TAX
In Gannon Dunkerley & Co. vs. State of Rajasthan (1993) 66 Taxman 229 (SC).
It was held that value of goods involved in the execution of a works contract will have to be determined by taking into account the value of entire works contract and deducting therefrom the charges towards labour and services.
Whatever has been excluded from ‘value’ for purpose of VAT/Sales Tax has been included in ‘value’ for the purpose of Service Tax.

50. OPTIONAL COMPOSITION SCHEME
Taxable value under this service is that part of the value of the works contract which is relatable to services provided in the execution of a works contract.
Such value is to be determined on actual basis based on the records maintained by the assessee.
The assessee is required to pay 2% of the total value of the works contract as service tax.
Assessee opting for the composition scheme is not entitled to avail Cenvat credit of capital goods, inputs or input services required for use in the works contract.
Option to choose for each works contract

51. VALUATION OF ‘WORKS CONTRACT SERVICE’ -AN ANALYSIS
Two options are available to service provider
1.Calculate value of service as per Rule 2A of the Valuation Rules and pay service tax at normal 12.36% (inclusive of education cess and SAH education cess) on such ‘value’ and avail Cenvat credit of input services, material and capital goods.
2. Pay Service Tax under ‘composition Scheme’ at 2.06% of ‘gross amount charged for works contract’ and forego Cenvat credit of input materials.

52. SERVICE TAX UNDER COMPOSITION SCHEME SALIENT FEATURES
Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 made effective from
The service provider can exercise option to pay service tax under Composition Scheme anytime before making payment of service tax.
Value of material supplied is not required to be added while it is to be added under composition scheme for constructions services as per Notification No. 1/2006-ST dated
Cenvat Credit of input services and capital goods.

53. UNDER THE ABATEMENT SCHEME THE VALUE OF MATERIAL SUPPLIED FREE OF COST BY THE CONTRACTEE SHALL NOT FORM PART OF THE GROSS AMOUNT CHARGED BY THE CONTRACTOR FOR THE SERVICES PROVIDED

54. GENERAL EXEMPTIONS:
Services provided to the United Nations or an International Organization declared by the Central Government.
Services provided to a developer of Special Economic Zone or to a unit of Special Economics Zone which satisfy certain prescribed conditions.
Value of goods and materials sold by the service provider to the recipient of service during the course of providing any taxable service, provided that no Cenvat credit has been taken on such goods and materials, or, if Cenvat credit had been taken, such credit is paid before affecting the sale.

55. CONCLUSION
The routine procedural and valuation matters under the Service Tax as well as under VAT/Sales Tax on taxability of Works Contract has more or less been settled.
It took almost 25 years for our legal system to synthesize and analyse the law implemented after the 46th Constitutional Amendment.
Due to the recent introduction of Service Tax combined with some interpretations of law already existing in various prouncements made by the Hon’ble Supreme Court, there are certain larger issues for taxability of ‘Works Contract’, which still needs legal deliberations.

56. Information on WEB SITE
Web Sites loaded with information provided by the Government to guide assesses in service tax matters:

57. Mr Piyush Aggarwal, Advocate
THANKS
I sincerely acknowledge the guidance and feedback received from my colleagues specially
Mr. Naveen Garg, Chartered Accountant
Mr. Arvind Sharma, Advocate
And
Mr Piyush Aggarwal, Advocate
R-13/24, RAJ NAGAR,
OPP. ALTC., GHAZIABAD
PH: ,