Taxindiaonline.com Taxindiaonline.com Taxindiainternational.com HRindiaonline.com
 
LOGIN
Forgot Password |  Register
Saturday , April 19, 2014 | Updated : Apr 18, 16:41 IST
Income Tax    Customs    Excise    Service Tax    FEMA    DGFT    SEZ    Misc    Pitara    Budget   
About Us Contact Us Advertise
Taxindiaonline.com Taxindiaonline.com Taxindiainternational.com
NEWS FLASH
 
As many as 86 Countries approve New OECD Guidelines on applying National VAT to cross-border transactions (See 'Breaking News') Cab Secretary invites top bureaucrats to evolve strategy to tackle US Pharma's IPR dispute ST - FIPL is only a Bottling Unit, supplying beer - sale is also being made to appellant or to its Indenters - Thus, appellant has neither provided any Franchise Service nor any IPR to FIPL - demands set aside: CESTAT (See 'Breaking News') Commerce Secretary to lead High-Level Delegation to India Show in HK (See 'Mixed Buzz') I-T - Whether onus is on assessee to produce sufficient records so as to show that there is no disproportionate allocation: HC (See '2014-TIOL-516') Employment issues will top agenda during OECD LEED Forum Meet (See 'Mixed Buzz') ST - in case of Mandap Keeper Services, catering service is incidental and ancillary and, therefore, charges for catering services would be includable in taxable value of Mandap keeper Services: CESTAT (See 'Breaking News') AP Police seizes Rs 45 lakh cash from wife of a former Minister CX - Appellant misrepresented facts before HC by stating that they had taken plea of financial hardship before Tribunal when facts were otherwise - Tribunal cannot assume financial hardship - Such conduct is highly improper: CESTAT (See 'Breaking News') CBDT prescribes SOP; Taxpayers can now get outstanding demands reduced or deleted by AOs (See 'Breaking News') RBI allows LLP firms to receive FDI subject to certain conditions (See Cir 123 in 'What's New') Ahmedabad DRI busts a gang of gold smugglers operating through Mundra Port; seizes 12 kg gold concealed in zinc die cast scarp billet Pakistan publishes tax particulars of all its 8 lakh taxpayers in a directory to shame tax cheats CBEC notifies Customs New Exchange Rates (See NT in 'What's New') Govt appoints Admiral R K Dhowan as New Navy Chief Chennai CBI Court convicts two IAS officers (See 'Mixed Buzz') Interesting - Judicial Reforms find place in Manifestos! (See 'The Cob(Web) Column) A woman employee of Central Government can take uninterrupted 730 days of Child Care Leave (See 'DDT' Column) Onions Smuggled from India to Nepal (See 'DDT') TP: No Cost - No Guarantee? (See 'TII Edit' in Taxindiainternational.com) Indian Industry is used to grow in lax standard environment: Cab Secretary (See 'Mixed Buzz')
 
Bookmark and Share
Works contract : Both Sales Tax and Service Tax can be levied but .....

By S Jaikumar & G Natarajan, Advocates

Part I framed the title poser and also a tributary question as to the applicability of Notification 12/2003 on Works contracts. In Part II the title poser was answered in the affirmative aided by the case study of the landmark decision of the Apex Court in the case of BHARAT SANCHAR NIGAM LTD Vs UNION OF INDIA (2006-TIOL-15-SC-CT-LB). In this last part of the sequel let us address the tributary question as to the applicability of the benefit of Notification 12/2003 to the Works contracts.

In the BSNL decision supra, while deciding that there can be a simultaneous levy of two or more taxes on the same transaction, the Apex Court has also observed that the same transaction may involve two or more taxable events in its different aspects! In other words, though there can be a simultaneous levy of two different taxes, namely, sales tax and service tax, on the same transaction, they shall be on different components such as sales tax on the "goods" component and service tax on the "service" component! This has been further reinforced by the Apex Court in the same decision, wherein, it has observed as:

"This does not however allow State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Art. 366 (29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax.

For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service."

Further, in this far-reaching judgement, the Apex court, while framing various questions has, interalia, also framed an interesting question as under:

"Would the "aspect theory" be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax?"

After addressing all the issues in finesse, the Apex Court observed as,

"The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service".

This ratio leaves us very clear that though there may be an overlapping of levy in a single transaction, there cannot be a overlapping of the value of such taxable events. The Apex Court in the case of Gujarat Ambuja Cements Ltd . v. Union of India (2005-TIOL-53-SC-ST) has held that,

"This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity".

To put it more lucid, if in a composite transaction like Works contracts for Rs 100/-, where there is an existence of both "goods" as well as "services", there can be a levy of both sales tax as well as service tax but the value for the sales tax shall be Rs.100/- minus the value of the service component and vice versa. In other words, if the value for the sales tax and service tax are added up, they cannot exceed the total value of the transaction.

Be it the State which levies the sales tax on a composite contract as per Art 366(29A) or the Centre which levies the service tax on such composite contracts as per Section 67 of the Finance Act, 1994, shall always keep the above ratio in mind, before prescribing the value for their respective levies.

Following the above ratio, the tributary question as to the applicability of the benefit of Notification 12/2003, has to be answered that, in a composite contract like works contract, if there is a prescribed taxable value for the payment of sales tax by the State, then the taxable value in such cases, for the purpose of payment of service tax, shall be the remainder. In other words, a service provider providing a service under a Works contract shall deduct the value on which he pays the sales tax/re-sale tax/VAT, as the case maybe and pay the service tax on the balance value and this would be in tune with the essence of Notification 12/2003 in such transactions. Of course, the service provider has to mention the sales tax value in his invoices/bills and shall also not avail any Cenvat credit on such goods which are the other conditions of the said Notification. Apart from the above, any interpretation as to the goods used/sold/consumed in provision of a service is NOT AT ALL WARRANTED on such Works contracts and would only add amusement to the settled legal principles.  

Before getting into the Circulars given by the Board let us consolidate the ratio spelt by the Apex Court in the BSNL case, supra:

  Consequent to the 46 th Amendment to the Constitution whereby an amendment was effected to Art. 366 (29A), the State is empowered to tax composite contracts like Works contracts, hire purchase contacts and catering contracts.

  Apart from the works contracts and catering contracts where splitting of the service and supply has been constitutionally permitted in Clauses (b) and (f) of Clause 29A of Art. 366, there is no other service which has been permitted to be so split.

  The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention then there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract.

  Goods may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customised satisfies these attributes, the same would be goods.

  Delivery of goods may not be simultaneous with the transfer of the right to use. But the goods must be in existence and deliverable when the right is sought to be transferred and therefore whether the goods are incorporeal or corporeal, tangible or intangible, they must be deliverable.

  The same transaction may involve two or more taxable events in its different aspects.

  The State shall not entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Similarly, the Centre cannot include the value of the goods, in the cost of the service.

Now let us apply the above ratio to the impugned Circular No. M. F. (D.R.) F. No. 233/2/2003-CX dated 3/3/2006, wherein the Board withdrew its earlier Circular dated 7/4/2003 and clarified that the goods consumed during the provisions of service, that are not available for sale, by the service provider would not be entitled to benefit under Notification No. 12/2003- S.T., dated 20.06.2003. While clarifying so, it appears that the said Circular has not at all applied the above ratio but has blindly proceeded to say that the benefit of notification 12/2003 shall not be applicable to the goods consumed during the provision of service. It has not discussed as to whether the said transaction is a Works contract or not? It has also not bothered as to whether there is any sales tax levied on the said transaction or not/ but as usual, it has unilaterally coined its own words and interpretation and has proceeded to clarify so!!!

Though the Circular is given under the context of photography, which is apparently not a Works contract, the field is applying the essence(!) of the above Circular to all services right, left and center, irrespective of the fact that, such services are whether Works contracts or not! For example, in a turnkey civil contract, which is essentially a Works contract, the service provider shall be using materials like cement, steel and glass, which are nothing but "goods". The contractor is also required to pay the sales tax (VAT) on a proportion specified under the total value of such Works contract as per Art.366 (29A). In such cases, applying the BSNL ratio, the service tax has to be levied only on the remainder i.e total value minus the value for which the contractor has paid the sales tax/VAT. But as per this present circular, as the goods like cement/steel/glass are the kind of goods consumed/used in the provision of service and may not be explicitly available for sale, the value for service tax shall include the value of such goods also, which is a fundamental violation.

Similarly in the other cases of works contracts, such as tyre retreading also, there is a sales tax levied on a particular portion by the State as per the Art.366 (29A). In such cases also, the retreading tyre may not be physically and separately available for sale at the hands of the service provider. In other words, such tyre would be consumed in provision of service. Applying the above Circular, the department may ask such retreading community to pay service tax on the whole value, irrespective of the fact that they have paid sales tax/VAT on a portion of that value, which would be totally against the law pronounced by the Apex Court in the BSNL case, supra.

Thus we are of the opinion that the contents of the Circular supra, shall not be applicable to the transactions involving Works contracts and in such cases the service provider shall pay the service tax only on the value which is the balance of the total value minus the value on which he has already paid either sales tax/re-sale tax/VAT, as the case maybe, under the Works contract Act, which is in accordance with the Notification 12/2003!

Last but not the least, the photography Circular was given by the Board on 3/3/2006, the BSNL judgement was rendered on 2/3/2006. Obviously, the department may not be aware of the ratio, when they issued the Circular, supra. But while issuing the latest one for the automobile sector on 6/11/2006, the Board should have taken due cognizance of the above ratio. As the Board Circular has started playing havoc in the field, its time the Board clarifies the position immediately and avoid a possible World War III!

Epilogue :

As on date, Tamil Nadu is yet to get into VAT. In the present Tamil Nadu Government Sales Tax (TNGST), there are two provisions for paying tax on Works contracts, namely, to pay sales tax or re-sale tax on the portion of the goods sold and the other one is to pay a flat 4.2% on the whole contract value. In the first case where the sales/re-sale tax is paid on the portion representing the sale of goods the above proposition is a simpliciter and the service tax can be paid on the remainder. But if the assessee opts to pay the flat 4.2% on the entire contract value, what is the value left for the service tax? Is it full or nil!!!

Concluded

(Also see Part-I & Part II)


POST YOUR COMMENTS
   
 
 
TIOL SEARCH
 
TIOL Mobile App
TIOL Subscriptions
 All-In-One Package
 Indirect Tax Package
 Income Tax Package
<< More Packages>>
 
   
             
Income Tax Customs Excise Service Tax FEMA DGFT SEZ Misc Pitara Budget
  • Notifications
  • Circulars
  • SC Cases
  • HC Cases
  • ITAT Cases
  • Instructions
  • Advance Ruling
  • Settlement
  • Other Case
  • Directorate of Income Tax (Systems)
  • Tariff Notfn
  • Non Tariff Notfn
  • Circulars
  • SC Cases
  • HC Cases
  • Cestat Cases
  • Settlement
  • Advance Ruling
  • Safeguard Duty Notfn
  • Anti-dumping Notfn
  • Drawback Cases
  • Tariff Notfn
  • Non Tariff Notfn
  • Circulars
  • SC Cases
  • HC Cases
  • Cestat Cases
  • Settlement
  • Advance Ruling
  • Excise Amendment
  • Clean Energy Cess Notfn
  • MISC Circulars
  • Commr.(A) Order
  • Notifications
  • Circulars
  • SC Cases
  • HC Cases
  • Cestat Cases
  • Miscellaneous
  • Advance Ruling
  • FAQ
  • Finance Act, 1994
  • Commr. (A) Orders
  • Removal of Difficulty
  • VCES
  • Accounting Head
  • Exchange Manual
  • Fema Notifications
  • SC Cases
  • HC Cases
  • RBI Notifications
  • Act
  • Rules
  • Regulations
  • Master Circulars
  • RBI Circulars
  • Notifications
  • Circulars
  • Public Notices
  • Trade Notice
  • FTDR Amendment 2010
  • MISC
  • State Acts
  • Notifications
  • Instructions
  • Act 2005
  • Rules 2006
  • DGEP
  • State Policy
  • SC Cases
  • HC Cases
  • VAT Cases
  • Deputation Posts
  • Service News
  • The Insider
  • Transfer
  • Promotion
  • Recruitment Rules
  • Transfer Policy
  • Training Circulars
  • Service Cases
  • MISC
  • Pay Commission
  • Cadre Review
  • Budget Circular 2013-14
  • Union Budgets
  • Economic Surveys
  • Budget Speeches
  • Finance Acts
  • Finance Bill
  • TRU - D. O. Letter
  • A Taxindiaonline Website. Copyright © 2014 Taxindiaonline.com Pvt.Ltd. All rights reserved. | Powered by 4th Dimension