1. SERVICE TAX FROM BUILDER’S PRESPECTIVE

2. OBJECTIVE
Availing advantage by adopting legal measures of tax planning.
To make cost of goods or services as competitive as possible.
To be burdened only by minimum levy of tax.
Business could be strategically planed to pay the correct amount of service tax.
To create legal awareness for in-depth examination.

3. Why Planning In Regime Of Service Tax Credit ?
Duty of the citizen to charge and pay correct amount of service tax.
Nothing less – Nothing more.
Law does not permit to charge more than the due tax.
Law also requires to pay just and right amount of tax.

4. Taxable Services as relevant to the Builders
Commercial or Industrial Construction.
Construction of Complex.
Consulting Engineer.
Dredging.
Erection, Commissioning or Installation.
Interior Decorators.
Management, Maintenance or Repair.
Site Formation and Clearance, Excavation and Earth Moving and Demolition.
Works Contract Service as recently introduced from

5. Classification Of Service
Wide scope of strategic planning in classification of taxable service.
A service beyond the scope of classified service is not taxable.
The use of word ‘include’ restricts the generally broader sense of classified service.
Service Tax Law only provides Rule of Classification of taxable service where such service is prima-facie classifiable in two or more categories.

6. Relationship of Service Provider & Service Recipient
If, a builder, promoter, developer or any such person undertakes construction work on his own without engaging the services of any other person, then there is no incidence of service tax on such builder etc. In such circumstances, the relationship of service provider and service recipient does not exist. It is in the nature of Self Supply of Services. This issue has been recently clarified by Reference Code No of Circular No. 96/6/2007-ST dt 23rd Aug 2007.

7. Services Provider Receiver
Construction Services
Commercial Concern
Any Person
Consulting Engineer
Professionally Qualified Engineer or Engineering Firm
Client
Transport of Goods By Road
Customer
Steamer Agents Service
Shipping Line
General Insurance Services
Person Carrying on General Insurance Business
Policyholder

8. CLIENT vs. CUSTOMER
The word ‘Client’ and ‘Customer’ not defined. Since they are used distinctively they should be construed differently
The client refers to services which are tailor made and designed / created under specific given circumstances.
The customer refers to services which are standard and repetitive in nature.

9. CLIENT vs. CUSTOMER
Wherever the word ‘client’ or ‘customer’ is used in the category of taxable service, it leads to the creation of liability of service tax at the last point.
Service between the two persons of same category of service providers with an aim to provide ultimate service to a client or customer is not taxable.

10. SERVICE RENDERED
Service should be rendered to such 8 broad types of persons specified under Service Tax Act.
Service tax liability exists only when service is provided to the ultimate client/ customers/subscribers, where such words are used in the definition.
Relationship between the service provider and the receiver should be of specified type to make the service taxable.

11. IN-DEPTH ANALYSIS OF CONTRACT OR AGREEMENT
WORKS CONTRACT
IN-DEPTH ANALYSIS OF CONTRACT OR AGREEMENT

12. ANALYSIS OF TURNKEY OR SERVICE CONTRACT
Contract has to be read as a whole, it cannot be bifurcated or partitioned.
Transfer of goods involved in execution of turn key contract or composite works contract are taxed as sale of goods.
It is not legally correct to tax one portion of gross receipt for one nature of taxable service while taxing the same service provider under a different category of service for another portion of gross receipt of same contract.

13. ANALYSIS OF CONTRACT
Executory Contracts have primary aim of execution through use of labour.
No consultancy or advise is required in Executory Contracts. Neither any technical assistance is rendered.
Annual Maintenance Contract undertaken and executed by Engineer or Consulting Engineer are not service of consulting.

14. ANALYSIS OF TURNKEY OR SERVICE CONTRACT
The transfer of goods involved in execution of a turnkey contract or composite works contract are already taxed under the Sales Tax/VAT as per the enlarged definition of ‘sale of goods’ as deemed Sale.
Tax cannot be levied under Service Tax on an amount representing the value of transfer of property in goods.

15. SPECIFIC STRATEGIC PLANNING BY BUILDER’S IN RESPECT OF IMPORTANT CATEGORIES OF TAXABLE SERVICES

16. COMMERCIAL OR INDUSTRIAL CONSTRUCTION SERVICES

17. ESSENTIALS Any service Provided to any person By any other person
In relation to commercial or industrial construction service .

18. Construction Services Means
(a) construction of new building or civil structure or a part thereof;
(b) construction of pipe line or conduit; or

19. Construction Services Means…
(c )completion and finishing services such as glazing, plastering, painting, floor and wall tiling, …… in relation to building or civil structure; or
(d)    repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit.

20. Construction Service Which is - Used, or to be used, primarily for; or
Occupied, or to be occupied, primarily with; or
Engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include road, airport, railway, transport terminal, bridge, tunnel and dam;

21. Necessary Considerations – Construction Services
Building or Civil Structure should be primarily used, occupied or engaged in ‘commerce or industry’, which should be legally interpretated.
Civil Construction for residential and habitation purpose not liable to tax under this Category.

22. Strategic Planning – Construction Service
Contract for civil construction of large factory including the development of residential area should be bifurcated into two contracts one for construction for commerce & industry and another for habitation i.e. residential area, club house, parks, schools etc.

23. Strategic Planning – Construction Service
Since the Turnkey Contracts for construction of building and civil structure do not have the benefit of relationship of agency between the service provider and the owner, so it is strategically advantageous to undertake two different contracts one for civil construction and another for erection, commissioning and installation of plant & machinery.

24. Construction Services- Defence Purposes
Construction of civil structures to protect the country and its citizens from enemy assault as well as construction of buildings for use by Defence Forces has not been specifically exempted.
Construction Service of building or civil structure for Defence purposes are not taxable as they are not primarily used, occupied or engaged in ‘commerce or industry’.

25. Construction of FACTORY For DEFENCE PRODUCTION
The construction of factory building for the Ordinance Factories which are wholly engaged in the production of Defence Equipment including explosives which are not commercially treaded by the Ordinance Factories, will not be liable to service tax.
Transport terminals, roads or bridges etc., which are specifically exempt from the levy of service tax the liability of service tax could be safely avoided.

26. Valuation of Taxable Service of Construction
Valuation of Taxable Service of construction shall be the gross amount charged by the service provider.
Elements, which may not reasonably fall within the ambit of service tax like Cost of goods or material used, transferred and sold by a service provider are exempt as per Notification No. 12/2003 dated 20th June 2003
Section 67 does not specifically allow above exclusions.

27. GREAT HARDSHIP
For the Service Providers under the category of “Commercial or Industrial Construction Service” or “Construction of Complex Service” or “Erection, Commissioning or Installation Service”
Such Services are also usually performed as a Composite Contract, but no specific provision for valuation of such service has been envisaged in the Service Tax (Determination of Value) Rules, 06.

28. MUTUALLY EXCLUSIVE
It is a settled law that service tax can be imposed only on the service portion of a Composite Contract.
No Service tax on the transfer of property in goods which is separately taxable under VAT/Sales Tax by the respective States.
‘Taxing entries must be constructed with clarity and precision so as to maintain such exclusively, and a construction of a taxation entry which may lead to overlapping must be eschewed.

29. LANDMARK JUDGMENT
The landmark judgment of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd.Vs. Union of India (2006) 145 STC 91 puts the controversy at rest.
The Central Excise and Service Tax Appellate Tribunals in the cases of Shilpa Colour Lab Vs Com. (2007) 8VST 554 and Adlabs Vs. Com. (2006) 2STR 121 have held that if in providing the services certain goods and materials are consumed, the value of those goods and materials cannot be included in the value of services for levy of service tax.

30. Valuation Rule 2-A must apply to all Composite Contracts in all Category of Services
The Government have recognized the settled law for levying service tax on the service of Works Contract by providing Valuation Rule 2-A, but have forgot to apply the same settled principle of law under the other categories of service which are also performed under a composite contract wherein the property in goods is also transferred alongwith the services.
Similar deductions should be allowed otherwise this will not only be discrimination, but also against the provisions of the settled law.

31. CENVAT Credit
The gross value charged by the building or civil contractors include the material cost, namely the cost of cement, steel, fittings and fixtures, tiles etc. Under the CENVAT Credit Rules 2004 the service provider can take credit of input liability of Excise Duty paid on such inputs from its output liability of service tax.
CENVAT CREDIT not allowed under optional Abatement Scheme.

32. OPTIONAL ABATEMENT/ALTERNATIVE TAX
Relief in calculation of Service Tax Noti. 1/2006.
Abatement of 67% of the gross value is allowed for cost of supplying/using goods.
Service providers who are only providing completion and finishing services are not eligible for abatement.
No credit under CENVAT Rules of Excise Duty paid on input goods and capital goods as well as service tax on input services shall be available.
The benefit under Not. No. 12/2003 ST for exemption toward cost of goods is not available.

33. CONSTRUCTION OF COMPLEX SERVICES

34. CONSTRUCTION OF COMPLEX SERVICES
Construction of complex services involving residential building having more than 12 units, townships, row-houses complex:
a)    construction of a new residential complex or a part thereof; or
b)    completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, ….. and other similar services.
c)     repair, alteration, renovation or restoration of, or similar services in relation to residential complex.

35. ‘Residential Complex’
i) a building or buildings, having more than Twelve Residential Units ;
ii) common area ; and
iii) any one or more of facility of 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-

36. ‘Residential 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.
Explanation – For the removal of doubts, ……
(a)‘Personal Use’ includes permitting the complex for use as residence by another person on rent or without consideration.

37. Residential Colonies for Personals of Defence Forces
The residential colonies developed and constructed by Defence Forces/Large Industrial Units allowing use of the constructed houses as residences will not attract any service tax.
Specific exclusion has been made in the definition of Residential Complex for those complexes which are intended for personal use.
As residence by such person or by another person on rent or without consideration.
The word ‘person’ has widest amplitude to include any organization or institution including any unit of the Defence Forces/Industrial House.

38. PRO ACTIVE MEASURES INITIATED BY DGST AGAINST ESTATE BUILDERS
The Hon’ble Supreme Court on the basis of typical contract document between the prospective buyer and the builder in M/s K. Raheja Development Corpn. Vs State of Karnataka (2005) 141 STC 298 have observed
“that the activities undertaken by builders for construction of flats/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under works contract and not under sale”.

39. Hon’ble Allahabad High Court in M/s Assotech Reality Pvt. Ltd Vs
Hon’ble Allahabad High Court in M/s Assotech Reality Pvt. Ltd Vs. State of U.P. (2007) 8 VST 738 after detailed examination of various clauses of the agreement between the prospective buyer and the builder as referred in Para 19, 21 and 27 of the Order have decided that
‘the construction undertaken by the petitioner could not be said to have been undertaken by it for and on behalf of the prospective allottees/
purchasers, but otherwise. Thus, the construction in question would not fall under clause (m) of Section 2 read with Section 3F of the Act’.

40. CONSULTING
ENGINEER’S
SERVICES

41. ESSENTIALS Any service To a client Provided by a ‘consulting engineer’
In relation to advice, consultancy or technical assistance
In any manner
In one or more disciplines of engineering.

42. Consulting Engineer Means
Any professionally qualified engineer or an engineering firm
Service of advise, consultancy or technical assistance.
In any engineering field.

43. Strategic Planning Consulting Engineer
Service provided by a professionally qualified engineer or engineering firm is only taxable.
Service provided by an experienced, but non-qualified person is not taxable.
Service provided by qualified engineer beyond the scope of any discipline of engineering is not taxable.
Service not covered as advise or consultancy or technical assistance not taxable.

44. Strategic Planning Consulting Engineer
Service provided as sub-consultant/associate consultant to another consulting engineer not taxable.
Service of providing any certificate under any statute is not taxable.
Service of preparation of drawings, documents, advise, consultancy or technical assistance under turnkey project will not be taxable being part of overall responsibilities under the contract. Vivisection of works contract is not permissible in the scheme of law.

45. Strategic Planning Consulting Engineer
Drawing and designing of any plant, machinery, equipment by its manufacturer are not taxable.
Service remuneration should be bifurcated into professional charges and reimbursement of expenses while issuing the invoice, as the reimbursement of actual expenses are not liable to service tax.

46. DREDGING SERVICES

47. DREDGING SERVICES
The activity of Dredging consists of excavation of material from the sea, river or lakebed and the re-location of the excavated material elsewhere for proper disposal.
The purpose of dredging is normally to establish and maintain navigational channels and harbour of sufficient size to accommodate ship, vessel or to provide soil for land reclamation work, to clean water bodies from animal waste, plastic bags, plant wasts etc

48. Inclusive Definition
‘Dredging’ includes removal of material including silt, sediments, rocks, sand, refuse, debris, plant or animal matter in any excavating, cleaning, deepening, widening or lengthening, either permanently or temporarily, of any river, port, harbour, backwater or estuary.’

49. COMMISSION AND INSTALLATION INCLUDING ERECTION

50. ESSENTIALS Service must be provided to a customer only.
By a commissioning and installation agency.
In relation to erection, commissioning or installation.
It must relate to plant, machinery or equipment.
Service provided for any other nature of goods outside the legal meaning of plant, machinery or equipment is not taxable.

51. Installation of –
a) electrical and electronic devices, including wiring or fittings therefore, or
b) plumbing, drain laying or other installation for transport of fluids; or
c) heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work; or
d)  thermal insulation, sound insulation, fire proofing or water proofing or
e) lift and escalator, fire escape staircases or travelators; or  such other similar services;

52. Erection, Installation & Commissioning
Erection Stage – putting of base as civil structure w.e.f 10/9/2004
Installation stage- the act of putting a plant, machine or equipment ready for use w.e.f. 1/7/2003
Commission stage – operationalising installed plant, machine or equipment w.e.f. 1/7/2003

53. Strategic Planning – Turnkey Projects
Turnkey projects are ‘indivisible’ contracts containing the element of ‘service’ as well as ‘sale of goods’
No separate value is assigned to service portion
No reasonable bifurcation of consolidated charges legally possible
Tax cannot be levied on the portion which is legally not taxable

54. Strategic Planning – Turnkey Projects
The option of paying service tax on some portion of the gross value of the composite value of contract on admitted breakup of value between sale of goods and service has been held as unreasonable .
Strike a clear balance between the imposition of service tax and sales tax on the same subject matter as per the decision of Hon’ble Apex Court.

55. Strategic Planning – Status & Relationship
‘Customer’ relation necessary, tax not leviable on service taken by ‘client’
Service provided by an ‘Agency’ other than commercial concern - not taxable
Service provided by an individual exempt 55

56. Strategic Planning – Status & Relationship
Relationship between a customer and service provider must be of agency.
A turnkey contractor provide the service as an independent contractor without interference and control of the owner as to how the contract has to be performed or executed.
There is a complete absence of relationship of agency .

57. Strategic Planning – Agent & Servant
Supreme Court have determined the difference between the relationship of master and servant and of principal and agent.
A principal has a right to direct what work the agent has to do.
A master has a further right to direct not only what work but how the work is to be performed.

58. Strategic Planning - Independent Contractor & Agent
Independent Contractor is entirely independent of any control or interference.
Independent Contractor merely undertakes to produce a specified result, enjoying his own means to produce that result.
An agent is bound to exercise his authority for all lawful instructions of his principal.
Agent is not subject to direct control or supervision of his principal.

59. Air-Conditioning, Electrification Lifts, and Fire Fighting System
The work of installation of air-conditioning including related pipe work, duct-work and sheet-metal work as well as for lifts and escalators and electrification work are specifically included in the definition and thus this work will be liable to service tax.
While, erection, commissioning or installation of fire fighting system will not be subjected to service tax as it is different than the work of fire proofing which is specifically included in the definition.

60. INTERIOR DECORATOR SERVICE

61. ‘Interior Decorator’
‘Interior Decorator’ means any person, whether directly or indirectly, in the business of providing by way of advice, consultancy, technical assistance or in any other manner,
any service provided or to be provided to a client,
by an interior decorator in relation to planning, design or beautification of spaces, whether manmade or otherwise in any manner

62. ESSENTIAL CHARACTER
Civil Contractor/Builder which normally executes the job of interior decoration as per the instruction of the interior decorator, so such civil contractor do not provide any service like advise, consultancy or technical assistance.
Essential Character of taxable service of Interior Decorator is the presence of relationship as a client

63. MANAGEMENT MAINTENANCE OR REPAIR SERVICE

64. Management, Maintenance or Repair
means any service provided by –
a. any person under a contract or an agreement; or
b. a manufacturer or any person authorised by him
in relation to –
i) maintenance of properties, whether immovable or not;
ii)maintenance or repair of properties whether immovable or not; or
iii)maintenance or repair including reconditioning or restoration or servicing of any goods.

65. Reconditioning or Restoration or Servicing
The word ‘Goods’ only refers to movable property and is never used to denote immovable property.
The specific service of reconditioning or restoration or servicing under the maintenance or repair work done by civil contractors/builders in relation to the immovable properties of the Defence Forces will not be subjected to Service Tax.  

66. Management, Maintenance or Repair
While defining some of the taxable services the words ‘includes’ have been used, this not only clarifies to specifically include the services enumerated thereafter, but also restricts the generally broader sense of the specified service. 
Further, the service should be provided to a ‘customer’ and thus there should be existence of a relationship between the service provider and the service recipient as of customer and not of client or any other relation.

67. SITE FORMATION AND CLEARANCE, EXCAVATION AND EARTH MOVING AND DEMOLITION SERVICES

68. Activities Covered
i)     drilling, boring and core extraction services for construction, geophysical, geological or similar purposes; or
ii)     soil stabilization; or
iii)    horizontal drilling for passage of cables or drain pipes; or
iv)    land reclamation work; or
v)     contaminated top soil stripping work;
vi) demolition and wrecking of building, structure or road.

69. EXCLSIONS
But does not include such services provided in relation to agriculture, irrigation, water shed development and drilling, digging, repairing, renovating or restoring of water sources or water bodies.
The important fact is that the services required in the sphere of protecting the country and its citizens by Defence Forces has not been excluded from the ambit of service tax.

70. Specific Exemption
Specific exemption under Notification No. 17/2005-ST dated has been provided to the service provided in the course of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, ports.
The construction of these civil structures of Defence Forces requiring site formation and clearance, excavation and earth moving and demolition will be exempt from payment of Service Tax.

71. WORKS CONTRACT SERVICE

72. Taxable Services as relevant to the Builders
Commercial or Industrial Construction from September
Construction of Complex from
Consulting Engineer.
Dredging.
Erection, Commissioning or Installation.
Interior Decorators.
Management, Maintenance or Repair.
Site Formation and Clearance, Excavation and Earth Moving and Demolition.
Works Contract Service as recently introduced from

73. ‘Works Contract’ under Service Tax
The Finance Act 2007 has sought to levy service tax w.e.f for the first time on certain specified ‘Works Contract’. The Finance Minister observed as follows:-
“State Governments levy a tax on the transfer of property in goods involved in the execution of a works contract. The value of services in a works contract should attract service tax. Hence I propose to levy service tax on services involved in the execution of a works contract. However, I also propose an optional composition scheme under which service tax will be levied at only 2 per cent of the total value of the works contract”.

74. THE BACKGROUND FOR THE LEVY ON WORKS CONTRACT
It is well settled that a ‘work contract’ cannot be vivisected and thus part of it cannot subjected to tax.
The attempt of department to levy service tax on the service portion of the works contract did not materialize.
It appears that this new service of ‘Works Contract’ has been introduced in order to overcome the effect of the court decisions, so as to tax the service element in the specified composite works contracts.

75. WHAT IS THE ‘TAXABLE SERVICE’-WORKS CONTRACT
“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”.

76. ‘Works Contract’
means 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 purpose of carrying out,-
-erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbering, drains laying or

77. Contd….
other installation 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
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduct, primarily for the purposes of commerce or industry; or

78. (c) construction of a new residential complex or a part thereof ; of
Contd….
(c) construction of a new residential complex or a part thereof ; of
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to
(b) and (c) or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects”.

79. SERVICES SEPERATELY TAXED AS AN INDEPENDENT CLASSIFICATION
ERECTION, COMMISSIONING OR INSTALLATION- The items listed in clause (a) are the same as those listed in the definition of ‘erection, commissioning or installation services’ given in clause 65(39a).
CONSTRUCTION SERVICES – The definition of services given in clauses (b), (c) and (d) are identical with the definition of services given in Section 65 (25b) for ‘commercial or industrial constructions services’ or ‘construction of complex services’ given in clause 65 (30a).
It is not clear from clause (ii) (c) of the Explanation as to whether the meaning assigned to residential complex in clause 65 (91a) will be applicable to this definition also.

80. OUTSOURCING A PART OF WORK BY ENGAGING A SUB-CONTRCTOR
The main contractor who owns the liability of service tax may engage another sub-contractor which is also a service provider for works contract.
As per Ref Code No of the Circular No. 96/6/2007–ST dated 23rd August 2007 the sub-contractor has also been put in his capacity as service provider liable for service tax for the services which may be input services for the main contractor.
It is important to note that CENVAT Credit of the service tax paid by the sub-contractor is available, if he does not opt for the composition scheme.

81. DETERMINATION OF VALUATION OF SERVICE IN ‘WORKS CONTRACT’
Rule 2A of the Valuation Rules provides that the value of taxable service in relation to services involved in the execution of a works contract :
Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.
It may be noted that –
gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract ;

82. Contd… (i) labour charges for execution of the works ;
value of works contract service shall include,-
(i) labour charges for execution of the works ;
(ii) amount paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architect’s fees ;
charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract ;

83. other similar expenses relatable to supply of labour and services; and
Contd…
cost of consumables such as water, electricity, fuel, used in the execution of the works contract;
cost of establishment of the contractor relatable to supply of labour and services ;
other similar expenses relatable to supply of labour and services; and
profit earned by the service provider relatable to supply of labour and services ;

84. Contd….
(2) Where Value Added Tax or Sales Tax, as the case may be, has been paid on the actual value of the transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under 1 above

85. Valuation Rule 2-A must apply to all Composite Contracts in all Category of Services
The Government have recognized the settled law for levying service tax on the service of Works Contract by providing Valuation Rule 2-A, but have forgot to apply the same settled principle of law under the other categories of service which are also performed under a composite contract wherein the property in goods is also transferred alongwith the services.
Similar deductions should be allowed otherwise this will not only be discrimination, but also against the provisions of the settled law.

86. CENVAT Credit
The gross value charged by the building or civil contractors include the material cost, namely the cost of cement, steel, fittings and fixtures, tiles etc. Under the CENVAT Credit Rules 2004 the service provider can take credit of input liability of Excise Duty paid on such inputs from its output liability of service tax.
CENVAT CREDIT not allowed under optional Abatement Scheme.

87. GREAT HARDSHIP
For the Service Providers under the category of “Commercial or Industrial Construction Service” or “Construction of Complex Service” or “Erection, Commissioning or Installation Service”
Such Services are also usually performed as a Composite Contract, but no specific provision for valuation of such service has been envisaged in the Service Tax (Determination of Value) Rules, 06.

88. MUTUALLY EXCLUSIVE
It is a settled law that service tax can be imposed only on the service portion of a Composite Contract.
No Service tax on the transfer of property in goods which is separately taxable under VAT/Sales Tax by the respective States.
‘Taxing entries must be constructed with clarity and precision so as to maintain such exclusively, and a construction of a taxation entry which may lead to overlapping must be eschewed.

89. LANDMARK JUDGMENT
The landmark judgment of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd.Vs. Union of India (2006) 145 STC 91 puts the controversy at rest.
The Central Excise and Service Tax Appellate Tribunals in the cases of Shilpa Colour Lab Vs Com. (2007) 8VST 554 and Adlabs Vs. Com. (2006) 2STR 121 have held that if in providing the services certain goods and materials are consumed, the value of those goods and materials cannot be included in the value of services for levy of service tax.

90. MUTUALLY EXCLUSIVE / OMPLEMENTRY VALUATION OF ‘WORKS CONTRACT’ FOR VAT/SALES TAX & SERVICE TAX
In Bharat Sanchar Nigam Ltd. v. UOI (2005) STT-0245 (SC), it has been clearly held that value of service cannot be included in price of goods. “The aspect theory would not apply to enable the value of service to be included in the sale of goods or the price of goods in the value of service”.
In Builders Associations of India v. UOI (1989) 73 STC (SC). The Tax is on ‘transfer of property in goods involved in execution of works contract’.

91. DEDUCTIONS PERMISSIBLE - ‘VALUE’ FOR PURPOSE OF SERVICE TAX
In Gannon Dunkerley & Co. vs. State of Rajasthan (1993) 66 Taxman 229 (SC).
It was held that value of goods involved in the execution of a works contract will have to be determined by taking into account the value of entire works contract and deducting therefrom the charges towards labour and services.
Whatever has been excluded from ‘value’ for purpose of VAT/Sales Tax has been included in ‘value’ for the purpose of Service Tax.

92. OPTIONAL COMPOSITION SCHEME
Taxable value under this service is that part of the value of the works contract which is relatable to services provided in the execution of a works contract.
Such value is to be determined on actual basis based on the records maintained by the assessee.
The assessee is required to pay 2% of the total value of the works contract as service tax.
Assessee opting for the composition scheme is not entitled to avail Cenvat credit of capital goods, inputs or input services required for use in the works contract.
Option to choose for each works contract

93. VALUATION OF ‘WORKS CONTRACT SERVICE’ -AN ANALYSIS
Two options are available to service provider
1.Calculate value of service as per Rule 2A of the Valuation Rules and pay service tax at normal 12.36% (inclusive of education cess and SAH education cess) on such ‘value’ and avail Cenvat credit of input services, material and capital goods.
2. Pay Service Tax under ‘composition Scheme’ at 2.06% of ‘gross amount charged for works contract’ and forego Cenvat credit of input materials.

94. SERVICE TAX UNDER COMPOSITION SCHEME SALIENT FEATURES
Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 made effective from
The service provider can exercise option to pay service tax under Composition Scheme anytime before making payment of service tax.
Value of material supplied is not required to be added while it is to be added under abatement scheme for constructions services as per Notification No. 1/2006-ST dated
Cenvat Credit of input services and capital goods.

95. GENERAL EXEMPTIONS:
Services provided to the United Nations or an International Organization declared by the Central Government.
Services provided to a developer of Special Economic Zone or to a unit of Special Economics Zone which satisfy certain prescribed conditions.
Value of goods and materials sold by the service provider to the recipient of service during the course of providing any taxable service, provided that no Cenvat credit has been taken on such goods and materials, or, if Cenvat credit had been taken, such credit is paid before affecting the sale.

96. Information on WEB SITE
Web Sites loaded with information provided by the Government to guide assesses in service tax matters:

97. THANKS
I sincerely acknowledge the guidance and feedback received from my colleagues specially
Mr. Naveen Garg, Chartered Accountant
And
Mr. Arvind Sharma , Advocate .
R-13/24, RAJ NAGAR,
OPP. ALTC., GHAZIABAD
PH: ,