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WORKS CONTRACTS UNDER GST

Goods and Services Tax - GST - By: - Srikantha RaoT - Dated:- 3-11-2017 - Taxation of works contracts has been a vexed issue in India over the years leading to considerable litigation. The main reason for this has been tax jurisdiction being split between Union and States with Services being taxed by the former while goods (transfer or sale thereof) were being taxed by the latter. With works contracts being composite supply contracts involving elements of goods as well as services, identificatio .....

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emed rate being adopted by Union for identifying the value of the service element involved in works contract execution for taxing at their end. This resulted in portion of the values being taxed by both Union as well as State under the deeming provisions in the concerned Statutes. As if complications associated with taxation of contracts involving construction, erection and commissioning works were not enough, there were also issues in taxing of software development related activities as evidenc .....

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time of introduction of the new GST law if old trends in terms of litigation had to be stopped. GST introduced across the country with effect from 1st July 2017 has sought to address the problem. While one reason for the old problem in terms of tax jurisdiction has been taken care of due to goods and services now being taxed by both Union as well as States, the other significant point has been the idea of restricting operation of the concept of works contracts to immovable property related contr .....

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s to the concept of movability or immovability of goods and this is where past judicial precedents in the context of Central Excise or Service Tax or VAT would assume significance and assist readers as the basic principle involved in applying movability test remains the same even under GST. Without being exhaustive, some of the notable decisions which could be relied on by readers are as below - Craft Interiors (P) Ltd Vs CCE Bangalore (2006 (10) TMI 2 Supreme Court of India): - Furniture seen t .....

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153 - SUPREME COURT ): - Cantilever assembly which comes into existence at the point of assembly of iron tubes of specified length in a cantilever design at a fixed place on the pole results from works contract and is not goods but a construction design. Beams, girders, bracket etc. become cantilever or cantilever assembly when fixed in a particular manner as a part of construction. Upon fixing on the iron mast/pole, this assembly becomes part of a permanent structure and cannot be called goods, .....

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ovable property. Aska Equipment (P) Ltd Vs CCE Nagpur (2006 (6) TMI 27 CESTAT Mumbai) maintained in (2009 (2) TMI 806 Supreme Court of India): - Towers put up at site which form part of earth/civil structure would be immovable property Solid & Correct Engineering Works & Others Vs CCE Ahmedabad (2010 (4) TMI 15 Supreme Court of India): - Setting up of asphalt drum mix plant by fixing it to a foundation with the help of nuts and bolts to provide a wobble free operation of the machine woul .....

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I 107 Supreme Court of India): - Spray paint booth held to be immovable property as outside portions of the structure were embedded in earth and dismantling would result in damage to structure. Virdi Brothers Vs CCE Indore (2001 (5) TMI 918 CEGAT New Delhi) affirmed in (2006 (12) TMI 3 Supreme Court of India): - Refrigeration/cold storage plant held to be immovable property as various bought out machineries were permanently fixed to the building by concrete foundation and they formed the refrige .....

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ces under clause 6(a) of Schedule II to the CGST Act 2017 which has to be read with Section 7(1)(d) of the Act. This would mean these contracts suffering tax at rates specified in the concerned Notifications dealing with taxation of services under CGST, SGST & IGST depending on the nature of works involved. The quantum of material used in the contract would be immaterial as entire contract would be taxed as a service. By regarding works contracts as service, the issues which could otherwise .....

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ring the rates applicable to goods based on their HSN Codes while service element would be taxed separately. Whether or not a contract would be composite works contracts or one of supply or installation would have to be gauged based on facts and circumstances of each case including the terms of the contract i.e. especially nature of property involved as well as timing of transfer of ownership/title in goods. This is where due care is needed as any error in classification could result in substant .....

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manufacture, supply and commissioning of pipelines to supply water to cities from specified dams - The agreement which was clearly in two parts, namely, (i) sale and supply of PSC pipes, jointing material specials, valves, anchor blocks, etc. and (ii) the remaining part being supply of labour and services was held to be divisible and not a single indivisible composite contract for laying pipelines. Consequently, PSC pipes, jointing materials, valves, anchor blocks etc. supplied were held to be .....

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a contract for labour and service. But, a composite contract for supply and installation, has to be treated as a works contract, for it is not a sale of goods/chattel as such. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the grounds that the components are brought to the site, i.e., building, and prepared for delivery. (M/s Kone Elevator India Pvt. Ltd Vs State of Ta .....

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tract and procurement especially where these cannot be diverted. (M/s ABB Ltd Vs Commissioner DVAT (2016 (4) TMI 534 Supreme Court)) Sale of residential apartment/unit under development and sale agreement - When the promoter/developer enters into a development and sale agreement with the flat purchaser under which a flat is constructed and eventually sold with the fraction of land, it is obvious that such a transaction involves the activity of construction in as much as it is only when the flat .....

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Court)) Fabrication of rolling shutters involving installation - Fabrication of rolling shutters held to be works contract as rolling shutters came into being when affixed to walls post masonry work. Where the contract is primarily one for supply of materials at a price agreed to between the parties for the materials so supplied and the work or service rendered is incidental to the execution of the contract the contract is one for sale of materials. Where the materials sought under contract have .....

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a works contract. (Vanguard Rolling Shutters & Steel Works Vs Commissioner Sales Tax UP (1977 (3) TMI 122 Supreme Court of India)) Fabrication and installation of bottle cooling equipment at factory - Where an inclusive price was charged for the work of fabrication of the bottle cooling equipment required in the premises of the customer and for installation of the equipment as per customer s needs, it was held to be works contract. Each bottle cooling equipment required special fabrication a .....

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ndia)). One of the issues that is likely to continue under GST is the legal position to be adopted where part of the work is sub-contracted. There have been instances where the Honorable Supreme Court has taken the view that the principal contractor would not be liable on the portion of work undertaken by the sub-contractor even if there is no privity of contract between contractee and the sub-contractor. This is on account of the fact that the property in goods passes by way of accretion to the .....

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56 Supreme Court). Considering the views taken by the Court in the context of development agreements, due care is needed in drafting clauses in the agreement with contractee/customer identifying the responsibilities of the principal contractor especially where sub-contracting is sought so that the principal contractor is not held liable for work done by the sub-contractor. Once there is a works contract as recognized under GST law, it could also be categorized as amounting to continuous supply o .....

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uld have to be followed by issue of receipt vouchers u/s 31(3)(d). As far as construction related services are concerned readers may note that there are two clauses in Schedule II to CGST Act 2017 to be read in conjunction with Section 7(1)(d) of the Act. These are clauses 5(b) and 6(a) which would cover pure labour services and works contracts respectively. Clause 5 of Schedule III to be read in conjunction with Section 7(2)(a) deals with sale of land and building (other than those involving co .....

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