WORKS CONTRACT

CONCEPT AND VALUATION

BACKGROUND

COMPOSITE CONTRACTS
SIMPLE EXAMPLE

Product

VAT Rate

Case 1
(Grocery Store)

Bread

0.00%

50.00

0.00

Butter

12.50%

50.00

6.25

Tomatoes

0.00%

25.00

0.00

Sandwich

4.00%

TOTAL

125.00

6.25

Case 2
(Eating House)

125.00

5.00

125.00

5.00

Can the Grocery Store pay tax of Rs. 5/- as sale of sandwich
Can the eating house be called upon to pay tax of Rs. 6.25 on
butter component of the sandwich
Can the eating house exclude bread and tomatoes components of
sandwich since they are exempt from tax?
What if the eating house charges Rs. 10 extra for extra butter on the
sandwich? What will be the tax rate on the same?

S B Gabhawalla & Co

Composite Contracts : Key Traits

Multiple Constituent Elements

Customer interested in single outcome
Most of the Constituent Elements are not outcomes in
themselves but a means to achieve the outcome
Various Combinations Possible
Supply of Multiple Goods

Supply of Goods with Ancilliary Services

Diverse Spectrum of Services

Services with incidental use of materials

Works Contracts

Composite Contract for Supply of

Multiple Goods

Assembled/Manufactured Product

Sandwich

/ Computer

Packing Materials and Accessories

Milk

packed in bottles

Safety Kits along with motor cars

Diverse Set of Goods

Biscuits

and Toys

Composite Contract for Supply of

Goods with Ancillary Services

Sale of Jewellery

with

Sale of Refrigerator

with

warranty

Sale of Microwave

with

Customised Gift Packing

training on use of the microwave

Supply of Food by Restaurant

With

Home delivery

Provision of Diverse Spectrum of

Services

A stock broker not only buying and selling securities

for the investor but also advising him on potential
transactions
A transporter also assisting in the loading and
unloading of the goods and the clearance of the
goods at the octroi check-post
A hospital offering cable connection
A credit card company offering accident cover

Provision of Service involving ancillary

use of materials

A chartered accountant submitting an audit report

A doctor also dispensing some medicines from his
own dispensary
A coaching class providing study materials to the
students
A testing agency using chemicals to test the product

Performance of Work involving transfer

of materials

Construction Contracts
Repair Contracts
Turnkey Assignments
EPC Contracts

Gannon Dunkerley:
Genesis of Third Breed
The expression sale of goods in entry 48 in List II of Seventh Schedule
to the Government of India Act, 1935 has the same meaning as the said
expression had in the Sale of Goods Act 1930 essential ingredients
being an agreement to the movables for a price and property passing
thereon pursuant to that agreement.
In a building contract which is entire and indivisible, there is no sale
of goods because in such a contract the agreement between the parties
is that the contractor should construct the building according to the
specifications contained in the agreement and in consideration
therefore receive payment as provided therein and in such an
agreement, there was neither a contract to sell the materials used in
the construction nor does the property pass therein as movables

Works Contract : Variations

A composite contract should not be vivisected to levy a tax on a specific

component of such a contract but should be analysed as a whole

State of Madras vs. Gannon Dunkerley & Co 9 STC 353 (SC)
Even in cases where the agreements provide for progressive payments
based on individual milestones

Sentinel Rolling Shutters & Engg. Co. vs. CST 4 SCC 260 (SC)
Even if specific price breakup is given for individual milestones

Daelim Industrial Co. Ltd. vs. CCE 155 ELT 457 (Tri) as approved by SC
Even if there are separate agreements

CIT vs. Sundwiger Empg & Co. 262 ITR 110 (AP)

Works Contract:
General Understanding

Transfer of Property by means of:

Accretion

Accession

Blending

Is Works Contract:

Sale

+ Service

Service (with a Deemed Sale)

(V1)
(V2)

OR

th
46

Constitution Amendment

(29A) tax on the sale or purchase of goods

includes
(b)

a tax on the transfer of property in goods (whether

as goods or in some other form) involved in the
execution of a works contract;

and such transfer delivery or supply of any goods

shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and
a purchase of those goods by the person to whom
such transfer, delivery or supply is made;

How to measure the tax? -- BAI

Since the taxable event is the transfer of property

in goods involved in the execution of a works
contract and the said transfer of property in such
goods takes place when the/goods are
incorporated in the works, the value of the goods
which can constitute the measure for the levy of the
tax has to be the value of the goods at the time of
incorporation of the goods in the works and not the
cost of acquisition of the goods by the contractor.

How to measure Specifics

Argued by Contractors

Defined by SC (BAI)

i) labour charges for execution of the works;

Should be reduced

ii) amounts paid to a sub-contractor for labour and services;

Should be reduced

iii) charges for planning, designing and architect's fees;

Should be reduced

iv) charges for obtaining on hire the machinery and tools used in the
execution of the works contract;

Should be reduced

v) cost of consumables such as water electricity, fuel etc.

Should be reduced

vi) transportation charges for transport of goods to the place of

works;

Cannot be reduced

vii) overhead expenses of the head office and branch office including To be apportioned
rents, salary, electricity, telephone charges, etc. and interest charges
to bank and financial institutions;
viii) profits expected on such contract.

To be apportioned

SERVICE TAX

Welcome Service Tax Legislation

Gradual Expansion of the Scope of Taxable

Services:

Consulting

Limb [1997-1998]

Executionary Limb [2004-2005]

Works Contracts [2007]

Declared Service - Negative List Regime [2012]

The Pie gets divided?

Whether Service Tax can be imposed on composite

works contracts? If yes,
From which date?

On What Value?

BSNL

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.

The deeming fiction by 46th Constitutional Amendment

valid only for the said lists and not beyond that
Geo Miller & Co vs. State of MP 5 SCC 209 (SC)

BSNL vs. UOI 3 SCC 1 (SC)

Negative List : Declared Service

Service portion in execution of a works contract

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
construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, alteration of any
moveable or immoveable property or for carrying out any
other similar activity or a part thereof in relation to such
property

Envisages vivisection
Value of goods liable for VAT

Service Component can be taxed under Service Tax

Generic Issues:

Difference between general concept of works

contract and as defined under service tax law
Position of Builders and Developers

Impact

of Larsen & Toubros case

Applicability of Partial Reverse Charge Mechanism

Concerns over Point of Taxation
Interpretation of Exemption Notifications
Valuation

VALUATION

Important Principles:
22

Section 67:

Gross

amount charged by the service provider

for such service provided or to be provided by him

No Notional Valuation Rules, however, non monetary

consideration taxable
Dominant Intention Test Important in contracts other
than works contracts and catering contracts
Rule 2A to determine the value of service portion in
works contracts

How to measure?
Deduction from Value of Goods

Inclusion as Value of Services

labour charges for execution of the works;

labour charges for execution of the works;

Amounts paid to a sub-contractor

Amounts paid to a sub-contractor for labour and

services

charges for planning, designing and architect's fees;

charges for planning, designing and architect's fees;

charges for obtaining on hire the machinery and tools

used in the execution of the works contract;

charges for obtaining on hire the machinery and tools

used in the execution of the works contract;

cost of consumables such as water electricity, fuel etc.

used in the execution of works contracts, the property
in which is not transferred in the course of execution
of works contract

cost of consumables such as water electricity, fuel etc.

used in the execution of works contracts

Cost of establishment to the extent to which relatable

to supply of labour and services

Cost of establishment to the extent to which relatable

to supply of labour and services

Profits earned to the extent to which relatable to

supply of labour and services

Profits earned to the extent to which relatable to

supply of labour and services

Concept.
To be offered to VAT

To be offered to Service Tax

Purchase of Goods

Value of Goods
incorporated in works

Consumables not incorporated in

works

Direct Expenses

To the extent incorporated

in Goods so transferred

To the extent not incorporated in

Goods so transferred

Overheads

Proportionate Basis

Proportionate Basis

Profit

Proportionate Basis

Proportionate Basis

GROSS CONTRACT VALUE

Valuation
Valuation Options

Rule 2A(i)

Rule 2A(ii) : where

the value has not
been determined
under clause (i)

Gross Amount
Charged for works
contract

Calculate total
amount charged Rule 2A(ii)(D)

Less the value of

property in goods
transferred

Presumptive Value
of Service defined

Presumptive Valuation : Current

Provisions
Nature of Works Contract

Presumptive
Value

Service

Execution of original works

40% of the total amount

charged

Works contracts connected with moveable properties

70% of the total amount

charged

Works contracts, other than contracts for execution of 60% of the total amount
original works, including contracts for completion and charged
finishing services such as glazing, plastering, floor and
wall tiling, installation of electrical fittings.

Valuation: Issues

If value can be determined, can presumptive

method be adopted?
If value is not adopted by the State VAT Authorities,
can the actual method be adopted?
What is the scope of original works?
What is the scope of inclusion of free issue
materials and services?

Calculation of Total Amount Charged

Gross
Amount
Charged

Fair Market
Value of all
Goods and
Services

Amount
Charged for
such Goods
or Services

Total
Amount
Charged

Gross Amount Charged

Fair Market Value of all Goods and Services

For the works contract

Supplied in or in relation to the execution of the works

contract
Whether or not supplied under the same contract or any
other contract

Presumptive Valuation: Historical

Perspective
Description

Rate/Val CENVAT
ue
on
Inputs

CENVAT
on Input
Service

CENVAT
on
Capital
Goods

FIM to
be
added?

Complet
ion
Service

Abatement Option
10.09.2004 to 28.02.2005

V= 33%

No

Yes

No

No

Yes

01.03.2005 to 15.06.2005

V= 33%

No

Yes

No

Yes

Yes

16.06.2005 to 28.02.2006

V= 33%

No

Yes

No

Yes

No

01.03.2006 to 30.06.2012

V= 33%

No

No

No

Yes

No

Composition Option
01.06.2007 to 28.02.2008

R = 2%

No

Yes

Yes

No

Yes

01.03.2008 to 07.07.2009

R = 4%

No

Yes

Yes

No

Yes

08.07.2009 to 30.06.2012

R = 4%

No

Yes

Yes

Yes

Yes

Bhayana Builders

Free supplies to construction service provider - They are outside taxable

value or gross amount charged, within meaning of expression in Section 67
of Finance Act, 1994
Exemption Notification cannot enjoin condition that value of free supplies
must also go into gross amount charged for valuation of the taxable service
Consideration for transfer of property in goods from seller to buyer - For
levy of sales tax, consideration for transfer of property in goods from seller
to buyer is relevant and tax must be levied on consideration for transfer of
property - This is unlike in case of Excise duty where levy is event based
and irrespective of whether goods are sold or captively consumed, liability
inheres even where manufacturer is not owner of raw material or finished
goods - This principle is equally applicable to levy of Service Tax under
Finance Act, 1994 and in particular in context of specific language in
Section 67 of Finance Act, 1994

THANK YOU