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SCOPE OF SOME IMPORTANT SERVICES

SCOPE OF SOME IMPORTANT SERVICES. PUNEET AGRAWAL, Advocate B. Com(H), CA, LLB. COVERAGE. Renting of immovable Property Service Works Contract Service Commercial or Industrial Construction Service Construction of Complex Service Erection, Commissioning and Installation Service.

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SCOPE OF SOME IMPORTANT SERVICES

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  1. SCOPE OF SOME IMPORTANT SERVICES PUNEET AGRAWAL, Advocate B. Com(H), CA, LLB

  2. COVERAGE • Renting of immovable Property Service • Works Contract Service • Commercial or Industrial Construction Service • Construction of Complex Service • Erection, Commissioning and Installation Service

  3. Renting of immovable property service

  4. Renting of immovable property service • Taxable w.e.f. 1.06.2007 • 65(105)(zzzz) to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce • Non commercial activities – not taxable • Following are excluded: • Renting by or to religious body • Renting to an educational body

  5. Renting includes (65 (90a) and (105)(zzzz) • Leasing, renting, licensing including permitting use of space without transfer of possession and control • Renting to commercial coaching or training centre • It includes renting for office, factory, godown, theatre, exhibition hall, etc.

  6. Immovable property does not include • vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes; • vacant land, whether or not having facilities clearly incidental to the use of such vacant land; • land used for educational, sports, circus, entertainment and parking purposes; and • building used solely for residential purposes and for accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

  7. Part use • Explanation 2.—For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course  or  furtherance of business or commerce;

  8. Is renting a service • Meaning of ‘in relation to’ • May be wide or narrow – depends on context • If the subject matter can be service, then includes the subject matter • Real estate cannot be service • Service tax is a value added tax • There is no value addition in renting • Other services such as air-conditioning can be service Home Solutions Retail 237 ELT 209 (Del)

  9. Current status • As per Delhi High Court order, there is no service tax on renting per se • Binding in Delhi • Since there is no contrary judgment, must be followed in other states • SLP pending in SC, no stay granted

  10. Future liability • If SC upholds Delhi HC ruling – no tax • Tax collected and paid – no refund • Tax paid but not collected – shown as receivable – may be claimed as refund • After payment of service tax, refund claim to be filed in each case • Payment to be made under protest • If SC reverses Delhi HC • Tax payable with interest

  11. Alternative for landlords • Collect tax and keep in joint bank account • Take indemnity

  12. Circular of deptt • F No. 336/10/2009 dated July 15 2009 • It is understood that consequent to the said judgement of the Honourable High Court of Delhi, many assessees have stopped paying service tax on the renting of immovable property for business or commerce. • In this regard, all the service tax formations are informed that the Department has filed an appeal against the said order of the Delhi High Court, and the dispute has not reached finality. Given the situation, service tax formations throughout the country, are instructed to take necessary action to safeguard revenue by either pursuing the tax payer to pay up the service tax due or resort to means under law to protect the revenue.

  13. Credit on construction • Circular 98/1/2008-ST dated 4.1.08 • Immovable property is neither any goods nor any service, thus no credit for construction service allowed • Input definition allows • Needs to be fought • If not paying service tax because of Delhi High Court ruling, keep record of credit

  14. Works contract service

  15. Works contract service 65(105)(zzzza) • To any person • By any other person • In relation to works contract

  16. Works contract for the purposes of this sub-clause, “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 purposes of carrying out,— • erection, commissioning or installation of plant, machinery, equipment or  structures, …….. • 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 • construction of a new residential complex or a part thereof; or • completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or • turnkey projects including EPC projects;

  17. Works contract under sales tax • Gannon Dunkerley I • Gannon Dunkerley II

  18. Does not include works contract in respect of: • roads, • airports, • railways,  • transport terminals, • bridges, • tunnels, and • dams

  19. Need for new head of service • Daelim 2003 (155) ELT 457 • L&T 2004 (174) ELT 322 • Blue Star

  20. classification Section 65A(2) • When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows:- • the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description; ………………

  21. Letter B1/16/2007-TRU dated 22.05.07 • “Various trades and industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or under erection, commissioning or installation and commercial or residential construction services. • Contracts which are treated as works contract for the purpose of levy of VAT/ Sales Tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition of works contract under section 65(105)(zzzza)”

  22. valuation • Tax is on works contract service • Rule 2A of Valuation Rules Value = Gross value of works contract (Less)value of transfer of property in goods • Value does not include sales tax • Value includes: • labour charges • Charges paid to sub contractor for labour and services • Planning designing and architect’s fee • Charges for machinery and tolls used • Cost of consumables such as water, electricity, fuel, etc • Cost of establishment and other expenses relatable to supply of labour and services • Profit earned by service provider relatable to supply of labour and services

  23. Value of services = Labour and services + attributable indirect expenses + attributable profit

  24. Contd… • If actual value determined under sales tax law, then the same shall be used • Issue • Can value determined under proportionate reduction provided under state VAT acts, be used for calculating value of service?

  25. Credit of goods used in construction • Can credit of goods and materials used in construction availed by the contractor • Value of goods and • Value of goods and materials excluded and therefore credit not available • Refer Circular 98/1/2008-ST

  26. composition • Alternative method • Pay tax @ 4% of gross amount charged

  27. gross amount charged “Explanation.-For the purposes of this sub-rule, gross amount charged for the works contract shall be the sum,- (a) including- (i) the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and (ii) the value of all the services that are required to be provided for the execution of the works contract; (b) excluding- (i) the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and (ii) the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire: Provided that nothing contained in this Explanation shall apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7th day of July, 2009.”;

  28. Condition for opting composition • Declared value of works contract should not be less than gross amount charged • Contractor cannot avail credit of inputs (input services and capital goods credit admissible) • Option for payment under composition scheme to be exercised prior to payment of service tax on the said contract • Option once exercised not to be withdrawn till completion

  29. Commercial or industrial construction service

  30. Taxable service • To any person • by any other person • In relation to commercial or industrial construction service

  31. “commercial or industrial construction service” means • construction of a new building or a civil structure or a part thereof; or • construction of pipeline or conduit; or • completion and finishing services such as glazing, plastering, painting, floor and wall tiling, ……carpentry,…… etc; or • repair, alteration, renovation or restoration services ….in relation to a building or civil structure, pipeline or conduit, which is — Used for or occupied with or engaged in commerce or industry, or work intended for commerce or industry

  32. Contd… but does not include such services provided in respect of • roads • airports • railways • transport terminals • bridges • tunnels and • dams

  33. valuation • Option 1 – pay tax on gross value and take credit of inputs, input services and capital goods • Option 2 – pay tax on value of services and reduce value of goods and materials property in which is transferred • Option 3 – Abatement under 1/2006-ST (now may not be relevant)

  34. Construction of residential complex

  35. Taxable service • 65(105)(zzzh) • To any person • By any other person • In relation to construction of residential complex

  36. Construction of Complex… • 65(30a) Construction of complex" means— • construction of a new residential complex or a part thereof; or • completion and finishing services in relation to residential complex such as glazing, plastering, painting… ; or • repair, alteration, renovation or restoration of, or similar services in relation to, residential complex;

  37. Residential complex • Any complex comprising of— • a building or buildings, having more than twelve residential units; • a common area; and • any one or more of facilities or 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

  38. …but does not include a 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 • "personal use" includes permitting the complex for use as residence by another person on rent or without consideration; • "residential unit" means a single house or a single apartment intended for use as a place of residence;

  39. valuation • Option 1 – pay tax on gross value and take credit of inputs, input services and capital goods • Option 2 – pay tax on value of services and reduce value of goods and materials property in which is transferred • Option 3 – Abatement under 1/2006-ST (now may not be relevant)

  40. issues • 1/2006 – ST • “Explanation - The gross amount charged shall include the value of goods and materials supplied or provided or used for providing the taxable service by the service provider.” • Whether value of free supplies includible • Delhi High Court – No (stay granted) New Era Developers

  41. issues • Development of townships • Agreement to sell entered into with prospective customers

  42. K Raheja 2005 (5) SCC 162 • If a real estate developer constructs a building under an agreement of sale with a prospective buyer and later on sells the building to the buyer, the transaction would amount to “works contract” • If the agreement is entered into after the flat or unit is already constructed, then there would be no works contract • Also important – Hare Krishna Developers [2008-TIOL-03-ARA-ST]

  43. Latest position • Magus Construction (Gau) (2008) 17 VST 17 • L&T (SC) 2008 17 VST 460 doubted K Raheja and referred to larger bench

  44. Erection, commissioning and installation service

  45. Taxable service • 65(105) (zzd) • To any person • By any commissioning or installation agency • In relation to erection, commissioning or installation

  46. erection, commissioning or installation means 65(39a) any service provided by a commissioning and installation agency, in relation to,— (i) erection, commissioning or installation of plant, “machinery, equipment or structures, whether pre-fabricated or otherwise” or (ii) installation of— (a) electrical and electronic devices, including wirings or fittings therefor; or (b) plumbing, drain laying or other installations 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 (f) such other similar services;

  47. valuation • Option 1 – pay tax on gross value and take credit of inputs, input services and capital goods • Option 2 – pay tax on value of services and reduce value of goods and materials property in which is transferred • Option 3 – Abatement under 1/2006-ST (now may not be relevant)

  48. Thank you Puneet Agrawal Partner Athena Law Associates +91 9891898911 puneet@athenalawassociates.com puneetagrawal_srcc@yahoo.co.in

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