ST on construction contracts - whether free supply of materials is to be included in gross amount charged for claiming abatement?

In a works contract there is no element of sale involved but property in goods pass on by accretion. In other words, a wroks contract is out and out a service contract. To circumvent this difficulty the Constitution was amended to introduce the concept of deemed sale to tax the goods involved in performing the service contracts, that is, works contracts. There may not be any need to amend the constitution to impose ST on works contracts since as mentioned above by nature these contracts are service contracts and sale element was only forcibly added by the concept of deemed sale and that is too for sales tax purpose alone. If that be so then leviability of ST on indivisible, this term is unwarranted when there is only service element involved, works contracts is not a problem. So far as abatement is concerned, Notification 12/2003 may be made applicable by borrowing the definition of sale from Central Excise Act which means transfer of possession.

21/02/2007

 

Agreed that works contracts are out and out service contracts. It is also true that when there is an element of goods included in service then there is recourse to Notification No. 12/2003 ST dated 21.06.2003 as amended or Notification No. 01/06 ST (S.Nos. 7 & 10) dtd 01.03.06 as amended. The earlier notifications referred to by the learned author were rescinded by Notifcation No. 2/06 ST dtd 01.03.06. However these notifications can be availed on a mutually exclusive basis.

The learned author has a point vis-à-vis the determination of the value of goods/material that is eligible for exclusion from the ‘gross amount charged’ by the service provider while availing the benefit of either of these notifications. He also raised the issue of whether value of the material supplied by the service recipient forms a part of the ‘gross amount charged’ or not.

At this juncture, reference is invited to section 67 of the act and the related valuation rules. The value of taxable service shall be determined within the framework of these provisions. They also provide for inclusion of money value equivalent to such free supply while determining the value of taxable service. Further, the explanation in Notification 1/06 ST also has a reference to ‘material supplied’. ‘Material supplied’ may also include material supplied to the service provider by the recipient. Hence this cost shall form a part of the value of taxable service. Hence determination of value of taxable service or the value of goods/material and 33% component for the purpose of Notification No. 1/06 ST are within the purview of the new valuation provisions.

santosh hatwar 21/02/2007