WHETHER THE BENEFIT OF COMPOSITION SCHEME UNDER WORKS CONTRACT SERVICE IS AVAILABLE FOR ONGOING WORKS CONTRACT?

[Mr. M. GOVINDARAJAN]

       Works Contract (Composition Scheme for Payment of Service Tax) Rules was made by the Government made effect from 01.06.2007.  The term 'Works Contract Service' has the meaning as defined under Sec. 65(105)(zzzza) of Finance Act, 1994.   According to Sec.65(105)(zzzza) the taxable service means any services provided to be provided 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.  The explanation to above section defines 'works contract' as 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 purposes of carrying out-

·        Erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations 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

·        Construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

·        Construction of a new residential complex or part thereof; or

·        Completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to the previous two points; or

·        Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.

The person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying an amount equivalent to four per cent of the gross amount charged on the works contract.

       The gross amount charged for the works contract shall not include value added tax or sales tax as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.

       The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

       The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

       The case law 'In Re. M.B. Chitale Constructions' 2008 (11) STR 583 (Commr. Appeals) gives the answer for the question arised in the topic.  The appellant with the intention to avail the benefit under Composition Scheme for payment of service tax approached the Central Excise Authorities and gave option of composition scheme under the new head of taxable service i.e., works contract service and accordingly requested for issuing fresh/amended registration certificate.  They further informed that they were issuing running bills and service tax was charged accordingly but they will take the benefit of composition scheme for the remaining part of the works contract.  The Deputy Commissioner in response to the letter of the appellant informed that they could not to pay service tax at 2% in respect of ongoing contracts due to the reasons spelt out in Rule 3 of the Rules as under:

Option should be given in respect of works contract prior to payment of service tax;

·  The option exercised shall be applicable for the entire work contract.

The appellants against the order of Deputy Commissioner, in this appeal made the following contentions:

That in the absence of any expression 'ongoing works contract' in the statutory provisions, notification or clarificatory circular of the Board, the Deputy Commissioner has no authority to give such a decision;

·  That the option under Rule 3(3) of Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007, is open and hence available to any service provider including the appellant on the part of works contract which is yet to be provided or completed and he can pay service tax @ 2% in respect of the part of the works contract to be executed after 1.6.2007.

·  That running bills are obviously made only part of the contract is completed in a progressive manner and when such running bills is made and when service tax is paid on such portion, then the next portion is totally a new job for further progress of the entire works contract;

·  That portion of the contract already executed before 01.06.2007 rightly attracted service tax under the then appropriate category.

The Commissioner (Appeals) held that in the instant case the appellant who is holder of service tax registration under 'commercial and industrial construction services', had already started paying service tax under the provisions of Notification No.1/2006 read with Section 66.  Besides the same Rules speaks that the option has to be exercised for the entire works contract.   In the instant case the appellant himself has accepted that they have provided some services and paying service tax on the running bills.  Therefore, a part of service has already been completed and service tax has been paid under Sec. 66.   Therefore, the appellant cannot exercise option under Rule 3(1) of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007.

       The Commissioner further held that composite scheme itself means that various elements which are taken together will complete a works contract.  In other words, the works contract is a contract for the sale of goods as well as the provision of work or services, but is indivisible in nature, meaning that the value cannot be easily broken into these constituent elements.  In the instant case the appellant has already provided some services and paid service tax.   As such the services for which the appellant wants to exercise option under works contract may not constitute a composite contract.  Besides in the composite contract the works contractor is required to pay service tax on the entire value of the contract without making a split of the value of the goods and material supplied and the value of the services provided.  But in the present case a part of the services have already been completed and therefore the remaining part of the service for which the appellant wants to exercise option under works contract services may not be considered as a composite works contact.

       In view of the above, the Commissioner held that the appellant is not eligible to exercise option under Rule 3(1).