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CONSTRUCTION SERVICE V/S WORKS CONTRACT SERVICES
Dear Professional Colleagues and friends, the objective of this article is to discuss the mist that surrounds classification of a service into Construction Service or Works Contract Service, especially under the new service tax regime.
Let us first look upon the relevant provisions to analyze them in a systematic manner.
We all know that w.e.f. 01-07-2012, Construction Service as well as Works Contract Service are notified as ‘Declared Service’.
Declared Service : According to Section 65B (22) of Chapter V of the Finance Act, 1994 (hereinafter referred to as “the Act”), Declared Service means any activity carried out by a person for another person for consideration and DECLARED AS SUCH under section 66E of the Act.
To put simply, declared services are services which are DEEMED to be service regardless of differing circumstances of each case and to show clear intention of the government to tax such transactions as ‘Service’.
Construction Service: Explanation II to Section 66E (b) of the Act defines the expression “Construction” to include additions, alterations, replacements or remodelling of any EXISTING CIVIL STRUCTURE.
Digging deeper, Section 66E (b) which deals with construction service only takes into its ambit CONSTRUCTION of a complex, building, civil structure or part thereof, including a complex or building intended for sale to buyer, wholly or partly, EXCEPT where the ENTIRE consideration is received AFTER issuance of completion certificate by the competent authority.
Works Contract Services : Section 65B (54) of the Act 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 purpose of carrying out CONSTRUCTION, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any MOVABLE or IMMOVABLE PROPERTY or for carrying out any other similar activity or part thereof in relation to such property.
To understand what constitute transfer of property in goods, consider this example:
If you purchase a new house today, you would say that you have purchased a house. But when you purchase a house, you in fact have also purchased the bricks, cement, steel, iron, etc. whatever goods were used to construct that house. By owning that house, you also own the material that was used in its construction and therefore, by legal fiction, what is sold to you is not just house but, goods viz. bricks, cement, steel, iron, etc. and services of labourers, the end result of which is a structure which you call ‘house’. So, the property (ownership) of such goods passes to you when you buy a house. This transfer of ownership of goods is typically called transfer of property in goods in execution of a Works Contract. This transfer can be through accretion, accession or blending.
Analysis:
- The scope of ‘Construction Service’ is limited to only ‘existing civil constructions’. Thus, where a new flat/house/building/complex is the subject matter of classification, it can only be classified as ‘Works Contract Service’.
- Construction Service includes only specified activities in relation to existing civil structures i.e. immovable property. It, therefore, emanates that it does not takes into its purview any of such specified activity performed in relation to movable property. Whereas, Works Contract Service takes into its ambit both movable as well as immovable property.
- Construction Service would not be classified as such unless the consideration or part thereof for such construction is received before issue of completion certificate by a competent authority. So, if 100% consideration is received after issue of completion certificate, would then any service tax be payable? Yes, as in that case, it would be a ‘Works Contract Service’.
- If a person contracts with a builder to re-construct his existing house and pays any amount before issue of completion certificate, be it in any name like advance, etc., it would be then taxable as Construction Service. On the other hand, if 100% payment is made after issue of completion certificate, it would be taxable as “Works Contract Service” provided the precondition for exigency of goods involved to Sales tax also fulfilled.
- Let’s take a typical example – if a person contracts with a developer to re-construct his 3 storey house into a 5 storey building and transfer the land development rights to him and in return thereof, the developer agrees to give the owner 3 out of 5 storeys, then such transaction would be covered under ‘Construction Service’ as the consideration in name of land development rights is received by the developer before completion of contract.
- Works Contract Service essentially involves transfer of property in goods in the execution of such contract. Leviability of Sales tax on such goods is another precondition. So, if someone contracts with a builder to buy a new already constructed house, there would be no works contract as the here the property in goods do passes to the buyer but only AFTER execution of construction/works. It is a simple transaction of sale, with no service tax implications.
- If a person contracts with a builder to buy a new house which is yet to be constructed, then it would amount to Works Contract as the property will pass to the buyer in the execution of such contract at some point of time in future.
- If a person contracts with a builder to construct a new house and takes on his responsibility to purchase and make available the goods required to construct it, then property in such goods already lies with the buyer even BEFORE execution of any work and it is just a contract for supplying labour. Therefore, it would not be classified as Works Contract.
- What if a person contracts to buy a house which is already half/part constructed? In that case, only that portion of construction contract which is done after the contract would be classified as ‘Works Contract’.
For any clarification/suggestion, feel free to contact at sarthak01991@gmail.com.
Best Regards
CA Sarthak Jain
References: 1) Finance Act, 1994 2) Larsen & Toubro v State of Karnataka (SC) 2013 41 ST 113 3) K Raheja Developers Corporation v State of Karnataka 2005 141 STC 298 (SC) 4) Ashok Kumar Garg v UOI (2002) 128 STC 442 (P&H HC) 5) Guidance Note published by CBEC |
