Service Tax on Construction Linked Services

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Service Tax on Construction Linked Services

• By
• CA. Atul Kumar Gupta

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Basic Division of Construction Activity

• Commercial Or Industrial Construction Services.
• Construction of Residential Complex Services.
• Preferential Location Services
• Maintenance, Maintenance and Repair Services.
• Services Performed under Works Contract.
• Renting of Immovable Property.

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Commercial Or Industrial Construction Services
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Commercial or Industrial Construction Services

• Applicable from 10th Sep 2004
• Covers-
• construction of a new building or a civil
  structure or a part thereof or
• construction of pipeline or conduit or

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Coverage..Continue

• completion and finishing services such as
  glazing, plastering, painting, floor and wall
  tiling, wall covering and wall papering, wood and
  metal joinery and carpentry, fencing and railing,
  construction of swimming pools, acoustic
  applications or fittings and other similar
  services, in relation to building or civil
  structure or

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CoverageContinue

• repair, alteration, renovation or restoration of,
  or similar services in relation to, building or
  civil structure, pipeline or conduit, which is
• (i) used, or to be used, primarily for or
• (ii) occupied, or to be occupied, primarily with
  or
• (iii) engaged, or to be engaged, primarily in,
• commerce or industry,
• or work intended for commerce or industry, but
  does not include

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Exemption

• such services provided in respect of roads,
  airports, railways, transport terminals, bridges,
  tunnels and dams
• Construction of Canal added in exemption list

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Issues

• Construction for Non Profit purpose
• Free Supply of Material by Contractee
• Notification No. 1/2006. i.e. abatement and
  CENVAT Credit.
• Abatement in Finishing Services
• Works Contract prior to 1st June 2007
• PMC Charges
• Main-Contractor Vs. Sub Contractor
• Ready Mix Concrete

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Issue-1 Circular No. 80/2004

• Such constructions which are for the use of
  organizations or institutions being established
  solely for educational, religious, charitable,
  health, sanitation or philanthropic purposes and
  not for the purposes of profit are not taxable,
  being noncommercial in nature. Generally,
  government buildings or civil constructions are
  used for residential, office purposes or for
  providing civic amenities. Thus, normally
  government constructions would not be taxable.

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Issue-2- Finishing Services-No abatement allowed

• Notification 1/2006 clarify that This exemption
  shall not apply in such cases where the taxable
  services provided are only completion and
  finishing services in relation to building or
  civil structure referred to in sub-clause (c) of
  clause (25b) of section 65 of the Finance Act.

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Definition of Finishing Services

• Definition of finishing services include such
  as glazing, plastering, painting, floor and wall
  tiling, wall covering and wall papering, wood and
  metal joinery and carpentry, fencing and railing,
  construction of swimming pools, acoustic
  applications or fittings and other similar
  services, in relation to building or civil
  structure.

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Issue-3-Free Supply

• Explanation added in Notification No. 1/2006
• The gross amount charged shall include the value
  of goods and materials supplied or provided or
  used by the provider of the construction service
  for providing such service.

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Legal Position-In favour

• LARSEN TOUBRO LTD. Versus UNION OF INDIA
  (MADRAS HIGH COURT)
• 2007 (7) S.T.R. 123 (Mad.)
• ERA INFRA ENGINEERING LTD. Versus U.O.I. (High
  Court Delhi)
• 2008 (11) S.T.R. 3 (Del.)

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P. CHANDRAN Versus COMMISSIONER OF C. EX., SALEM
2008 (12) S.T.R. 33 (Tri. - Chennai)

• The question now is as to how the expression
  used can be understood. The three expressions
  supplied, provided and used occurring in
  the text of the Explanation are separated by the
  word or. It is pertinent to note that the
  phraseology used in the Explanation is not
  supplied, provided or used. It appears, in this
  situation, the principle of ejusdem generis
  cannot be applied to the expression used. Prima
  facie, therefore, we are inclined to accept the
  interpretation offered by the learned counsel,
  which also seems to be consistent with the
  legislative intent underlying the relevant
  statutory provision (Section 67 of the Finance
  Act, 1994).

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P. CHANDRAN Versus COMMISSIONER OF C. EX., SALEM
2008 (12) S.T.R. 33 (Tri. - Chennai)

• Accordingly, for the present purpose, we read the
  expression used so as to mean supplied and
  used by the service-provider for purposes of the
  present case, wherein cement and steel were
  supplied by the service recipient and used by the
  appellants as part of rendering of the taxable
  service in question. In this view of the matter,
  prima facie, the appellants were not liable to
  include the cost of cement and steel in the
  gross value charged for the purpose of
  determining the service tax liability under
  Notification No. 15/2004-S.T. ibid. Accordingly,
  there will be waiver of pre-deposit and stay of
  recovery in respect of the tax and penalty
  amounts.

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Free Supply

• Finally settle through Finance Act (2) 2009 w.e.f
  7th July 2009.
• Works Contract Services Composition Scheme
• Composite Contract
• Two Separate Contract
• Free Supply
• Contract entered prior to 7th July.

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Issue-4- Abatement and CENVAT Credit

• Notification 1/2006 debar from 1st March 2006.
• Period prior to that (Notification 18/2005)
• SANTOSH ASSOCIATES Versus COMMISSIONER OF SERVICE
  TAX, AHMEDABAD, 2009 (16) S.T.R. 87 (Tri. -
  Ahmd.)

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Issue-5 Works Contract Services

• Works Contract Prior to this period will be
  taxable or not.
• What about the Commercial or Industrial
  Construction services after introduction of Works
  Contract Services.
• Section 65A

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Issue-6-PMC Charges

• Whether the Full turnover is booked under
  Profitability or only the Monitoring Charges.
• What is the treatment of Deposit Money.
• Under what capacity the Contractor has been
  appointed?
• As Main Contractor
• As Sub Contractor
• Whether the Contractor is discharging the Service
  Tax liability or not?

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Issue-7-Main Contractor Vs. Sub Contractor

• If main Contractor paid the entire tax, then Sub
  Contractor is liable to pay or not?
• SEW CONSTRUCTION LTD. Versus COMMISSIONER OF
  CENTRAL EXCISE, RAIPUR
• 2008 (12) S.T.R. 304 (Tri. - Del.)
• JAC AIR SERVICES PVT. LIMITED Versus
• COMMR. OF C. EX., NEW DELHI
• 2008 (11) S.T.R. 516 (Tri. - Del.)
• Circular F.N. 43/5/97-TRU, dated 2-7-1997
• Master Circular reverse the Position

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Issue-8 Ready Mix Concrete

• Whether Taxable under Service Tax
• Whether the Pumping Charges taxable under Service
  Tax.
• CONTINENTAL FOUNDATION JOINT VENTURE (CFJV)
  Versus C.C.E., CHANDIGARH, 2002 (150) E.L.T. 216
  (Tri. - Del.), Classifiable under sub-heading
  3824.20 of Central Excise Tariff Act, 1985 with
  effect from 1-3-1997.

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Construction of Residential Complex Services

• Applicability from 16th June 2005
• More than 12 Dwelling units in a residential
  Complex
• Notification No. 1/2006
• Free Supply
• Main Vs Sub Contractor
• Flats Sale Vs Services
• Flats Constructed for Defence or Other Government
  Organisation

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Issue-Sale of Flats-Whether Service or Sale-

• MAGUS CONSTRUCTION PVT. LTD. Versus UNION OF
  INDIA 2008 (11) S.T.R. 225 (Gujrat HC)
• Construction of Residential Complex service -
  Sale of flats - Liability to Service tax -
  Petitioner engaged in construction of
  premises/flats for sale to persons with whom
  agreement entered - Petitioner asked to obtain
  registration under commercial or industrial
  construction service and construction of complex
  service -

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Sale of Flats-Whether Service or Sale-

• Agreement indicating that impugned transaction is
  one of sale and purchase of premises and not for
  carrying out construction activity on behalf of
  prospective buyer - Documents treated as
  agreement for sale of flat/premises by
  registering authorities and stamp duty levied on
  sale consideration -

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Sale of Flats-Whether Service or Sale-

• Impugned construction carried out by
  petitioner-company for its own self and
  relationship of service provider and service
  recipient absent - C.B.E. C. Master Circular
  clarifying impugned issue binding on Department -
  Advance amount given by prospective buyer is
  against sale consideration of flat/building and
  not for obtaining service - Petitioner not liable
  to Service tax and not required to take
  registration - Sections 65(105)(zzzh) and 69 of
  Finance Act,

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Sale of Flats-Whether Service or Sale-

• Harekrishna Builders Advance Opinion

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Settled through

• Circular No. 108/02/2009 F. No. 137/12/2006-CX.4
  dated 29th Jan 2009
• Generally, the initial agreement between the
  promoters / builders / developers and the
  ultimate owner is in the nature of 'agreement to
  sell'. Such a case, as per the provisions of the
  Transfer of Property Act, does not by itself
  create any interest in or charge on such
  property. The property remains under the
  ownership of the seller (in the instant case, the
  promoters/builders/developers).

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Settled through

• It is only after the completion of the
  construction and full payment of the agreed sum
  that a sale deed is executed and only then the
  ownership of the property gets transferred to the
  ultimate owner. Therefore, any service provided
  by such seller in connection with the
  construction of residential complex till the
  execution of such sale deed would be in the
  nature of 'self-service' and consequently would
  not attract service tax.

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Reversal of Position through Finance Bill
2010-Explanation Added

• Buyer books a flat before its construction
  commencement/completion, pays the consideration
  in installments and takes possession of the
  property when the entire consideration is paid
  and the construction is over.
• Agreement to Sell
• No transfer of Ownership
• Builder Continue as owner of Property
• Later on Sale deed is executed and stamp duty
  paid.

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Different Modus Operandi

• Construction Agreement
• Sale of undivided portion of Land
• Will be Taxable unless the entire Payment is made
  after completion certificate obtained under any
  Authority of Law.
• Applicable both for Commercial and Residential
  Projects.

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Queries

• What about the existing Projects?
• What about the payment already collected for
  which partial construction is also completed?
• Construction is going on in a area where no
  approval is required. Whether will be taxable?
• How the Department will calculate the percentage
  of Completion?

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Whether Construction by Cooperative Society will
be Taxable

• Service to self
• Circular No. 108/2009 Clarify
• SHRINANDNAGAR CO-OP. HOUSING SOCIETY LTD. Versus
  C.S.T., AHMEDABAD, 2009 (16) S.T.R. 440 (Tri. -
  Ahmd.)
• Construction of Its Own Not Taxable as per Master
  Circular and Circular No 332/2006

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Circular No 108/2009

• The matter has been examined by the Board.
  Generally, the initial agreement between the
  promoters/builders/developers and the ultimate
  owner is in the nature of agreement to sell.
  Such a case, as per the provisions of the
  Transfer of Property Act, does not by itself
  create any interest in or charge on such
  property. The property remains under the
  ownership of the seller (in the instant case, the
  promoters/builders/developers). It is only after
  the completion of the construction and full
  payment of the agreed sum that a sale deed is
  executed and only then the ownership of the
  property gets transferred to the ultimate owner.
  Therefore, any service provided by such seller in
  connection with the construction of residential
  complex till the execution of such sale deed
  would be in the nature of self-service and
  consequently would not attract service tax.
  Further, if the ultimate owner enters into a
  contract for construction of a residential
  complex with a promoter/builder/developer, who
  himself provides service of design, planning and
  construction and after such construction the
  ultimate owner receives such property for his
  personal use, then such activity would not be
  subjected to service tax, because this case would
  fall under the exclusion provided in the
  definition of residential complex. However, in
  both these situations, if services of any person
  like contractor, designer or a similar service
  provider are received, then such a person would
  be liable to pay service tax.

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Whether the Value of Land to be included in Value
of Services rendered

• Notification No. 18/2005 gross amount charged
  shall include the value of goods and materials
  supplied or provided or used for providing the
  said taxable service by the said service
  provider.
• K. MANMOHAN MALLY Versus COMMR. OF C. EX.
  (APPEALS), MANGALORE 2009 (16) S.T.R. 621 (Tri. -
  Bang.)

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Issue-More than 12 Dwelling Units in a Complex

• What is Residential Complex
• (91a) residential complex means any complex
  comprising of -
• (i) a building or buildings, having more than
  twelve residential units
• (ii) a common area and
• (iii) any one or more of facilities or services
  such as park, lift, parking space, community
  hall, common water supply or effluent treatment
  system,
• located within a premises and the layout of such
  premises is approved by an authority under any
  law for the time being in force, but does not
  include a complex which is constructed by a
  person directly engaging any other person for
  designing or planning of the layout, and the
  construction of such complex is intended for
  personal use as residence by such person.

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Individual Residential Units Whether Taxable

• No, MACRO MARVEL PROJECTS LTD. Versus COMMR. OF
  SERVICE TAX, CHENNAI, 2008 (12) S.T.R. 603 (Tri.
  - Chennai)
• Then Whether Taxable after introduction of Works
  Contract Services-No

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Taxability of Joint Venture

• FAQIR CHAND GULATI Versus UPPAL AGENCIES PVT.
  LTD. 2008 (12) S.T.R. 401 (S.C.)
• The use of the words joint venture or
  collaboration in the title of an agreement or
  even in the body of the agreement will not make
  the transaction a joint venture, if there are no
  provisions for shared control of interest or
  enterprise and shared liability for losses. para
  21

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Services of builder for providing preferential
location or development of such complex

• Taxability of charges for other facilities as
  these charges do not form part of the taxable
  value for charging tax on construction like
• prime/preferential location charges for allotting
  a flat/commercial space according to the choice
  of the buyer
• (i.e. Direction- sea facing, park facing, corner
  flat Floor- first floor, top floor, Vastu-
  having the bed room in a particular direction
  Number- lucky numbers)
• (b) internal or external development charges
  which are collected for developing/maintaining
  parks, laying of sewerage and water pipelines,
  providing access roads and common lighting etc
  (c) fire-fighting installation charges and (d)
  power back up charges etc.

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Exclusion

• Charges for Parking
• Development charges, to the extent they are paid
  to State Government or local bodies, will be
  would be excluded from the taxable value levy
• Any service provided by Resident Welfare
  Associations or Cooperative Group Housing
  Societies consisting of residents/owners as their
  members would not be taxable under this service.

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Maintenance, Maintenance and Repair Services.

• Repair and Maintenance of Immovable property
  included from 16th June 2005.
• The same also included in the Works Contract
  Services.
• Repair of Roads become exempted through
  Notification No 24/2009

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Maintenance, Maintenance and Repair Services

• Issues
• No abatement in-spite of material used.
• Works Contract include and provide composition
  scheme but not clarified the same is in relation
  to New Building or old one also.

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Works Contract Services

• Only Contracts wherein the Transfer of Property
  in Goods is Involved in execution of Contracts.
• Five nature of Contracts are covered
• Two Scheme of Payment of Tax
• CENVAT availability.
• Ensure to give Declaration for Composition
  Scheme
• Rate of Tax under Composition Scheme.
• Valuation based on Finance Bill(2) 2009.

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Renting of Immovable Property Services

• Applicable From 1.6.2007
• Issues
• Whether Really Taxable
• What is the quantum of Taxability after recent
  decision of Delhi High Court. What course of
  Action need to take.
• CENVAT Credit on various Services used including
  Construction Services.
• Recent Budget Amendment
• What to Pay? Tax, Interest and Penalty?
• What about STR already Filed?

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Thank You

• CA. Atul Kumar Gupta
• www.servicetax.net
• (M) 9810103611
• atul_at_servicetax.net
• pctl_at_rediffmail.com