3.1.

Article on Service Tax:

3.2. CONSTRUCTION RELATED SERVICES & SERVICE TAX LIABILITIES [Extracts from D.V.Shidhayes Compilation on C.D. Construction Sector and service tax liabilities C.D.]

Success Story of Contractors in Nashik providing Road Construction services:

Identical is the case of another Contractor at Nashik. He constructed underground stormy water clearance system to protect the Nashik citizen from the disasters of heavy rain fall. Department started demanding Service tax. This demand was also ridiculous and nakedly violating the decisions of Tribunals, Courts etc. besides the Board Circulars and ignoring the statutory provisions. There might be many more sailing in same boat. They may refer to file No. 05. CONSTRUCTION OF PUBLIC WATER SUPPLY DRAINAGE SYSTEMS ETC AND SERVICE TAX LIABILITY in this folder only. If all such contractors come together and fight against the injustice collecti vely then they have chances of saving the colossal financial loss and mental worries. Now this exhaustive note is divided into four parts. The Builders Association in the interest of their members should give circulation to this note. Part I provides key notes for quick understanding. Part II explains meanings of important words and expressions used in Construction Contracts. It also explains exceptions from two main construction services where service tax is not applicable. Part III explains Importance of Section 64A of the Sale of goods Act 1930. Always to be remembered and cited in each tender or contractual offer. Part IV provides in tabular form a list of Taxable services which are either provided by Civil Contractors or are concerned to their business. Notes of Precaution: The Acts and rules are changing fast on the budget day also and in between two budgets also. What is legal today becomes illegal tomorrow and what is illegal today becomes legal tomorrow. Obviously information given in this long article needs updating from time to time. Further at many places opinion or views of author are given as per his personal understanding of the statutory provisions and these may be or may not be acceptable in legal disputes. When question of interpretation arises the ultimate authority of correct interpretation is only Supreme Court of India and not the authors like Shri D.V.Shidhaye. New G.S.T. Tax system First Discussions paper showing the glimpses of the new revolutionary Tax Regime called as Goods and Service Tax is released by Shri Asim Kumar Dasgupta, Chairman, Empowered Committee of, State Finance Ministers & Minister of Finance & Excise, Government of West Bengal New Delhi, on 10 November 2009. Then Finance Ministry offered its own comments and suggestions were invited on the draft. It reiterated that this Tax regime would be a reality very soon. If every thing goes well necessary constitutional amendments are made, consensus amongst majority of states on the Rates of GST is arrived then in 2011, G.S.T. Tax system shall be in operation replacing Excise, Service tax and CST at the Central level (CGST). VAT system and few other taxes at State level would be replaced by SGST. For Interstate Transactions another novel system of IGST shall be introduced. What shall be the position of Civil Contractors in the Construction Sector? Author simply does not know today. However in that regime also Construction sector shall have to bear the burden of Taxes as they are bearing today. Then this note shall have to be redrafted according to the provisions of the GST. In short, life of this note is not long enough to cover the subject due totoo many complexities.

3.3. PART - I
KEY NOTES TO CONTRACTORS ENGAGED IN BUSINESS INVOLVING CONSTR UCTION OF ANY KIND: 1) For Civil Contractors, This note is summery of Major output services provided normally by majority of civil contractors. These are their output services and they have to pay service tax as output service providers. If they get some or part of these services done from sub contractors (Outsourcing) then these services are treated as their input services. Besides there are a number of other taxable input services which they have to procure from others like Consulting engineers, Architects, Transporters, Hiring of construction machinery and so on and consume these services in their output services. 2) Tendering systems in India and Global tenders: When any kind of construction work is to be done for Government, Semi Government and Local self government organizations, the contracts are awarded on Tendering system. Tenders for Projects are many times in huge volumes divided in to two or more than two Sections. Some Sections deal with technical Specifications of the project, Inspection and quality testing norms, Inspecting authorities. (called as Technical bids). Some sections deal with commercial aspects like earnest money, Security deposit, payment terms, manner of making payments guarantee / warranty obligations, Manpower utilization portion, labor laws, time limit for completion of contract, Penalties or liquidated damage clauses, inclusion or exclusion of Government Taxes, duties and other levies involved and so on. (Called as Commercial bids). Third Part is the estimated cost of the project in many cases particularly when invited by Government organizations like P.W.D. etc. Normally here the contractors are in India or even Local contractors and contracts are to be completed in India. Payments to contractors is made in Indian Rupees. Example- Tenders invited by State P.W.D. or Central PWD or Municipal Corporations for the Projects like construction of Roads, Bridges, Tunnels, Flyovers, underground water supply or drainage systems, Schools, Hospitals, Government offices, Warehouses, Transport terminals like Bus stands, Public utility Gardens, Markets and so on. Here the Bidders are mostly Indians. All money transactions are in Indian Rupees. Main contractors and sub contractors can be Indians. Burden of domestic indirect Taxes and duties This burden falls on Main Contractors and the subcontractors appointed by Main contractors. Fortunately these indirect taxes can be recovered from the customers if agreed in the tender conditions. The main taxes are (a) Excise duties if goods are manufactured in India (b) Service tax mostly service tax on works contract which is collected by both State Government and Central Government on same project. Local octroi (Jakat) is also to be paid in certain Municipal areas. International Competitive Biddings: Some tenders involving high financial stakes and high science and technology are invited from Contractors located all over the world. In such tenders foreign contractors also participate. Here is the involvement of foreign currency, imported material and imported services. Here the Main Contractors and Sub contractors can be within India as well as outside India. Examples- Thermal or Hydro electricity generating Projects, Mineral Oil and Gas exploration Projects, Dams and so on. Here some projects are funded by world banks on certain terms. Differential treatment to International competitive bidders - Here Foreign Trade Policy gives plenty of tax incentives or immunity from the domestic taxes and duties treating them as Deemed Exports. In both cases the tenders are to be submitted in the prescribed formats and in prescribed manner. The wording of tenders in India is drafted without much consideration of the present tax structures and the expressions used in them are used for ages traditionally. This fixes many successful bidders in to legal disputes from tax colleting machinery especially on the indirect taxes like Service tax, Excise, Cenvat, State Vat etc.

3) Free supplies of any material from customers increases tax liability:Many times customers i.e. service receivers supply to the Contractors some material free of cost like say Cement, Steel, Glass etc. This is to be used in the construction work. As per valuation section 67 of the Finance Act 1994 read with Service Tax (Determination of Value) Rules, 2006, value of such goods is treated as additional consideration received in kind. Therefore, cost of such freely supplied material has to be added in to the total value of contract and then to work out the tax liability. This so now in works contact service also. 4) Cum Tax Price: Sometimes contractors do not prepare proper service tax invoices indicating there in clearly the value of taxable service provided and service tax payable separately. Whether the customers pay the amount of service tax or does not pay, the contractors as service provider have to pay the service tax. In such situation the service tax burden can be reduced by treating the amount received as Gross value charged inclusive of service tax and then he has to work out back words the value without tax. Thereby at least part of the tax burden is saved. This is as per Section 67 only. 5) Just for the information of Contractors: Our business and Laws Shri D.V.Shidhaye has released an excellent reference book Our business and Laws in November 2008. This printed book in itself is a business compendia for all businessmen including Civil Contractors. It provides plenty of useful tips to all Contractors who enter in to contractual agreements or participate in Government Tenders. Most important chapters of this book for example are Chapter 5 Chapter 6 Chapter 7 Chapter 16 Chapter 29 Common Expressions in international and domestic transactions Understanding of Sales, Service and Works Contract Importance of documents and records in business. Government Tenders. Exemptions, Exceptions, Concessions and Exclusions.

Export and Deemed Export Benefits [Practical approach to encash them] This is yet another compilation of Shri D.V. Shidhaye for the benefit of successful bidders in international competitive bidding. It explains how such bidders can claim deemed export benefits from DGFT. This compilation is now available on this CD itself. Cenvat Credit facility: Contractors have to procure inputs, capital goods and input services from others for consumption or use in or in relation to the taxable services provided by them. 6) Pertinent question is when Credit of Service tax can be taken by such contractors? Straight forward yes or no answer is not possible. This decision has to be taken on facts, terms of contractual agreements wording chosen in the agreements etc and the definitions given in Rule 2 of Cenvat Credit Rules 2004 and so on. (a) If the contractors take benefit of any conditional exemption Notification where there is clear condition putting a bar for taking cenvat credit, then contractors can not take credit e.g. if on erection, installation and commissioning service or construction and industrial and commercial service. Here if contractor takes benefit of exemption Notifications like say No. 1/2006-ST dated 1/3/2006, providing abatement facility (value of taxable service = 33% of gross value charged) then no cenvat credit. (b) If in the service (a) above, contractor is only for labor then the question of using own material does not arise. There is no abatement. Here credit of input service can be taken. (c) Credit of GTA service can be taken for bringing in inputs at the site of construction. (d) WCT service if composition is opted, and service tax is paid at 4 % of gross value then credit of input service can be taken. [However no credit allowed on excise duty paid on inputs] (e) No Cenvat credit on major construction inputs like Cement and steel - Most important amendment to Rule 2 of Cenvat Credit Rules after 2009-10 budget is the amendment to explanation 2 of the definition of Inputs - Now it reads Explanation 2. - Input include goods used in the manufacture

of capital goods which are further used in the factory of the manufacturer; *[but does not include cement, angles, channels, centrally twisted Deform bar (CTD) or thermo Mechanically treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods] [Comments (a) * inserted by Notification No. 16/2009-C.E.(N.T.) dated 7/7/2009.(b) The amended explanation 2 can create legal disputes so far as providers of Construction services are concerned. Normally for civil contractors, cement and steel items are major inputs. It appears that Contractors shall not be allowed to take Cenvat credit of these major inputs while providing any construction services. 7) Provisional Assessment when in doubt: The Definitions of all taxable services are very difficult to understand. Even Courts and Tribunals give contradictory decisions adding to confusion. The attitude of many Excise officers is hostile to the honest tax payers. They are more interested in issuing Show Cause cum demand Notices on any flimsy grounds. While doing so they conveniently ignore the decisions of higher Courts or even the provisions clarified in Law. The sufferers are the contractors. Many times the contractors and their consultants do not know what should be the correct advice whether to pay service tax or not to pay. If they pay but others do not, then they lose the tenders. Provisional Assessment is a better shield for them in such situation. Question: When contractors should ask for provisional assessment? What is the procedure for that? Rule 6 of Service Tax Rules 1994 is important for all contractors who provide only taxable construction services. Sub rule No.6(4) reads Where an assessee is, for any reason, unable to correctly estimate, on the date of deposit, the actual amount payable for any particular month or quarter, as the case may be, he may make a request in writing to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, giving reasons for payment of service tax on provisional basis and the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, on receipt of such request, may allow payment of service tax on provisional basis on such value of taxable service as may be specified by him and the provisions of the Central Excise (No.2) Rules, 2001, relating to provisional assessment, except so far as they relate to execution of bond, shall, so far as may be, apply to such assessment. [Comment: This sub clause is substituted w.e.f.16/7/2001 by Notification 5/2001-S.T. dated 9/7/2001] Sub rule 6(5) Where an assessee under sub-rule (4) requests for a provisional assessment he shall file a statement giving details of the difference between the service tax deposited and the service tax liable to be paid for each month in a memorandum in Form ST-3A accompanying the quarterly or half yearly return, as the case may be. [Comment: In the opinion of author the Contractor should file both ST3A and ST3 returns simultaneously. Example Mr. X has constructed compound wall for Deccan College Pune and received Payment of Rs. 6 lakhs for that. In the same period he has done construction of a factory manufacturing excisable goods worth Rs. 50 lakhs. He has also executed some road construction contract and received Rs. 10 lakhs. Outwardly all these appear to be Industrial and Commercial services. However there are exceptions in the definition and these are (a) Roads can never be repaired. Construction of only new road (whether one foot long or 1000 Miles long) is possible. Please read File No.2 Success story in this folder only. (b) Industrial and commercial service Construction service does not include ,such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;] Here there can be doubt. In this situation Mr. X must file usual return in ST 3 form and also to file with it ST3A return. ST3 A is nothing but a supporting statement. References of these circulars or such circulars or Notifications should be given to strongly plead your case.

Refer - Board Circular No. B2/8/2004-TRU dated 10/9/2004 says(c) Construction services (commercial and industrial buildings or civil structures)

13.1 Services provided by a commercial concern in relation to construction, repairs, alteration or restoration of such buildings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done, by a building or civil contractor. Estate builders who construct buildings/ civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor/ contractors, the payment made to such contractor would be subjected to service tax under this head. The tax is limited only in case the service is provided by a commercial concern. Thus service provided by a laborer engaged directly by the property owner or a contractor who does not have a business establishment would not be subject to service tax. 13.2 The leviability of service tax would depend primarily upon whether the building or civil structure is ''used, or to be used'' for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such constructions which are for the use of organizations or institutions being established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable, being non-commercial in nature. Generally, government buildings or civil constructions are used for residential, office purposes or for providing civic amenities. Thus, normally government constructions would not be taxable. However, if such constructions are for commercial purposes like local government bodies getting shops constructed for letting them out, such activity would be commercial and builders would be subjected to service tax. 13.3 In case of multi-purpose buildings such as residential cum commercial construction, tax would be leviable in case such immovable property is treated as a commercial property under the local/ municipal laws. 13.4 The definition of service specifically excludes construction of roads, airports, railway transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified that any pipeline other than those running within an industrial and commercial establishment such as a factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction of pipeline running within such an industrial and commercial establishment is within the scope of the levy. 13.5 The gross value charged by the building 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 excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-ST) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost. (refer notification No.15/04-ST, dated 10.09.2004) This would, however, be optional subject to the condition that no credit of input goods, capital goods and no ben efit (under notification no. 12/2003-ST) of exemption towards cost of goods are availed. If Construction of internal roads inside a Commercil / Industrial or Residential complex then Service tax is payable because it is not merely construction of road service. [Refer -Board Circular No. B1/6/2005-TRU dated 27/7/2005 says -

if the contractor of construction of commercial complex is a single contractor and the construction of road is not recognized as a separate activity as per the contract, then the service tax would be leviable on the gross amount charged for construction including the value of construction of roads (All circulars issued by CBE&C, except letters of TRU have been withdrawn vide CBEC&C Circular No 96/7/2007-ST dated 23/8/2007. thus, TRU letter are still valid.)] If an assessee is unable to correctly estimate the actual amount payable as Service Tax for any particular month or quarter, he may make a request in writing to the Asstt./ Dy. Commissioner of Service Tax/Central Excise, giving reasons for seeking payment of Service Tax on provisional basis. On receipt of such request for provisional assessment, the authority may allow payment of Service Tax on provisional basis on such value of taxable service as may be specified by him. Upon finalization of such assessment, if a liability of service tax arises, the differential amount be paid by the assessee. If he has paid excess amount he would be entitled to refund. The provisions of the Central Excise Rules relating to provisional assessment (except execution of bond), shall apply to such assessment. The assessee requesting for provisional assessment shall file a statement giving details of the difference between the Service Tax deposited and the Service Tax liable to be paid for each month in a memorandum in Form ST-3A accompanying the half yearly return in Form ST-3. How is the provisional assessment finalized ? In case the Service Tax assessee resorts to provisional assessment after following the procedure and furnishes the returns in Form ST-3A along with Form ST-3, it is the responsibility of the Asstt. /Deputy Commissioner to complete the assessment after calling for from the assessee the relevant documents or records, as may be considered necessary by him. Wherever the Asstt./ Dy. Commissioner, after considering all the details/documents proposes to re-assess the Service Tax liability, the finalization of the provisional assessment would be made after providing adequate opportunity to the assessee by issuing the show cause notice and giving opportunity of being heard in person.

3.4. PART - II
Meanings of Important words and expressions used in Construction Contracts 1) Construction this word has many divergent meanings. It is a noun of the verb to construct To Construct means (a) make by fitting parts together; to build. Relevant meaning in present context as per Oxford dictionary is (a) The act or a mode of constructing (b) a thing constructed. Normally in commercial parlance the construction means construction of - (a) Buildings (Residential or commercial or combination of both), (b) Fabricated structure firmly erected on the earth (c) Roads, (c) Commercial and industrial premises (e) Dams, Bridges, air ports, and so on. Such construction includes civil engineering, mechanical engineering, welding, electrical wiring, plumbing, sanitation and so on. 2) Maintenance or to maintain and repair: Every object has its own designed or expected life. To maintain the status or condition of that object is a continuous activity from beginning till the end of its life. Once the life is over, further repair or reconditioning is not possible. Repairing or restoring or reconditioning is one time action but maintenance is a continuous activity. Example - Road Maintenance and repairs- Service tax on the Management, Maintenance and Repair service is the taxable service even if this service relates to immovable property like building. (i) But the author ar gued in representation to Board made by a group of some Nasik Based Road contractors that repair of roads is never possible (ii) Management of Public Roads is done by Government or Societies and not by Road contractors (iii) maintenance of road is nothing but cleaning of it or watering. This was accepted by Government and the out come was first Board circular No. 110/4/2009-ST.(F. No. 345/ 17 /2008-TRU) Dated 23/2/2009 and followed by Notification No. 24/2009-Service Tax dated 27/7/2009

thereby exempting the taxable service, referred to in sub-clause (zzg) of clause (105) of section 65 of the Finance Act,1994, provided to any person by any other person in relation to management, maintenance or repair of roads,

3) Definitions of common expressions used in Construction sector (reference- Section 2 of the Indian Contract Act, 1872). a) Proposal: section 2(a) Proposal when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal; (as per Indian Contract Act, 1872). b) Promise: Section 2(b) of Act provides that when one person to whom proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise; c) Promisor: Section 2(c) of Act the person making the proposal is called as person accepting the proposal is called as the promisee. promisor and the

d) Consideration: Section 2(d) of Act provides that when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does, or abstains or promises to do or to abstain from doing; something, such act or abstinence or promise is called a consideration for the promise. e) Agreement: Section 2(e) of Act provides that every promise and set consideration for each other, is an Agreement. of promises, forming the

f) Void Agreement: Section 2(g) of Act provides an agreement not enforceable by law is said to be void g) Contract: Section 2(h) of Act provides an agreement enforceable by law is a Contract

3.5. PART - III

Importance of Section 64A of the Sale of goods Act 1930. Always to be remembered and cited in each tender or contractual offer Author observed that majority of businessmen as well as those who draft the tender documents often neglect the existence of provisions in this section. Section 64A (In contracts of sale, amount of increased or decreased taxes to be added or deducted)(1) Unless a different intention appears from the terms of contract, in the event of any tax of the nature described in sub-section (2) being imposed, increase, decreased or remitted in respect of any goods after the making of an contract for the sale or purchase of such goods without stipulation as to the payment of tax was not chargeable at the time of making of contract, or for the sale or purchase of such goods tax-paid where the tax was chargeable at that time, (a) if such imposition or increase so taken effect that the tax or increased tax, as case may be, or any part of such a tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such a tax or increase of tax, and he shall be entitled to be paid and to so for and recover such addition; and (b) if such a decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer may deduct so much from the contract price as will be

equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction. (2) The provision of subsection (1) applies to the following taxes, namely:(a) any duty of customs or excise on goods; (b) any tax on sale or purchase of goods. [Comments: When it is not possible to give exact cost break up (Cost of material, cost of labor, transportation, electricity and other facilities etc.) then contractor has to quote lump sum price after adding the burden of Central, State and local Government Taxes and Duties and Cesses etc. at the rates prevailing at the time tendering stage itself and quote the grand total lump sum price. Thereafter to add this clause The lump sum price quoted is inclusive of duties of excise, service tax, state vat, other local taxes at the rates prevailing at the time of tender acceptance. If there is any reduction in the prevailing rates letter on the benefit shall be passed on to the contractee. At the same time if there is any increase in the rates of the same then the contractee shall bear the increased burden in accordance with the provisions of Section 64A of the Sale of goods Act 1930.]

3.6. PART - IV
Taxable services which are either provided by Civil Contractors or are concerned to their business The list of major Taxable output services normally provided by civil contractors at a glance. These are the output services on which the contractors are liable to pay the service tax. If X is the customer, Y is main contractor and Z is sub contractor of Y then Z should pay service tax on the price received from Y, and can recover from Y. Y being main contractor should pay service tax on entire value of the contract and recover it from X. Here Z can be only one sub-contractor or many sub contractors. S.No. Name of taxable Definition of taxable Service tax Remarks regarding service & service as per relevant is amendments relevant section section as on August 2008 applicable under F.A. 1994 from 1 Erection, From 1-5-2006 erection, 1/7/2003. (a)Erection word inserted Installation and commissioning or from 10/9/2004. commissioning installation means any (b) Definition during period Service. service provided by a 10-9-2004 to 15-6(zzd) commissioning and 2005.erection, Taxable from installation agency in commissioning,or installation 1/7/2003. relation to (i) erection, means any service provided by Structures commissioning or a commissioning and whether installation of plant, installation agency in relation fabricated or machinery or equipment or to erection, commissioning or otherwise were structures, whether preinstallation of plant, machinery inserted from fabricated or otherwise; or or equipment 1/5/2006 only. (ii) Installation of - (a) [(Portion (ii) inserted in the electrical and electronic definition from 16/6/2005. devices, including wirings or fittings therefore; or (b) (c) This service also can be plumbing, drain laying or classified under Works other installations for contract service from transport of fluids; or (c) 1/6/2007. heating, ventilation or air(d) Abatement available and conditioning including service tax can be paid at 33% related pipe work, duct work of gross amount charged and sheet metal work; or (d) without benefit Cenvat Credit thermal insulation, sound facility. insulation, fire proofing; or (e) lift and escalator, fire escape staircases or travelators; or (f) such other similar service. 1A Commissioning "commissioning and The word erection is inserted and installation installation agency" means

Agency [S 65(29)[

Construction of Industrial and Commercial complex Section 65(25b) and 65(105)(zzq)

any agency providing service in relation to erection, commissioning or installation (25b) commercial or industrial construction service means (a) construction of a new building or a civil structure or a part thereof; or (b) construction of pipeline or conduit; or (c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, 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, which is (i) used, or to be used, primarily for; or (ii) occupied, or to be occupied, primarily with; or (iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;

from 10/9/2004

10/9/2004

(a)words construction of pipeline or conduit inserted from 16/6/2005 (b) words completing or finishing building or civil structure inserted from 16/6/2005. [This means pre construction services like centering etc. is not taxable] (c) In other words the entire service definition became applicable from 16/6/2005. Abatement is available (33%) for this service if no cenvat credit facility taken. (d) This can be treated as Works contract service also from 1/6/2007 at the option (e) Circular No.B2/8/2004TRUdated 10/9/2004 said (i) In case of multi purpose buildings such as residential cum commercial construction, tax would be leviable in case such immovable property is treated as Commercial Property under the local /municipal laws. (ii) Such construction which are for the use of the organizations or institutions being established solely for educational, religious, charitable, being non commercial in nature not taxable. General Government buildings or civil constructions are used for residential, office purposes or for provising civic amenities. Thus normally Government construction wouod not be taxable

Construction of Residential complex. S 65(30a) & 65(105)(zzzh)

(30a) construction of complex means construction of a new residential complex or a (a) part thereof; or completion and finishing services in relation (b) to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and

16/6/2005

Service tax not payable if the construction is done only for 12 or less than 12 residential tenements may be called as bungalows or flats etc.

railing, construction of swimming pools, acoustic applications or fittings and other similar services; or repair, alteration, renovation or restoration (c) of, or similar services in relation to, residential complex; 4 Works Contract Service D.V.Shidhaye has prepared an exhaustive write up on this new service brought in to service tax net w.e.f. 1/6/2007 and is updated from time to time. This article is available in separate file No.06 WORKS CONTRACT SERVICE in this folder only. (64) management, maintenance or repair means any service provided by (i) any person under a contract or an agreement; or (ii) a manufacturer or any person authorized by him, in relation to, (a) management of properties, whether immovable or not; (b) maintenance or repair of properties, whether immovable or not; or (c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle; Explanation. For the removal of doubts, it is hereby declared that for the purposes of this clause, (a) goods includes computer software; (b) properties includes information technology software; 1/7/2003 (a) Initially this service was restricted to only plant and machinery from 1/7/2003. (b)words Maintenance or management of immovable properties were substituted from 16/6/2005. (c)management of properties, whether immovable or not; were substituted from 1/5/2006.

Management, maintenance and repair services S.65(64) and S 65(105)(zzg)

Interior Decoration Service Sections 65(59) and 65(105(q)

(59) "Interior decorator" means any person engaged, whether directly or indirectly, in the business of providing by way of advice, consulting, technical assistance or in

16/10/1998

to any person is substituted from 16/5/2008. (Earlier it was to a client) Manufacture of furniture is not covered under this service but it is covered under Central

any other manner, services related to planning, design or beautification of space, whether man-made or otherwise and includes a landscape designer (q) Taxable service means service provided or to be provided to any person, by an interior decorator in relation to planning, design or beautification of spaces, whether manmade or otherwise, in any manner

Excise.

Some other Important Services which should also be known to contractors because these can be their input services. This is not a complete list but only a few are mentioned for the sake of awareness. 1 Consulting engineering services. S. 65(31) & 65(105)(g) (31) "consulting 7/7/1997 engineer" means any professionally qualified engineer or any body corporate or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to any person in one or more disciplines of engineering; [Substituted vide Finance BIll 2008, w.e.f. 16th May, 2008] (g) Taxable service - to any person, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering including the discipline of computer hardware engineering. Explanation. For the purposes of this subclause, it is hereby declared that services provided by a consulting engineer in relation to advice, consultancy or technical assistance in the disciplines of both computer hardware engineering and computer software engineering shall also be classifiable under this sub-clause; [Clause (g) substituted vide Finance Bill 2008,

w.e.f. 16th May, 2008] 2 Cleaning activity services S 65(24b) and 65105)(zzzd) cleaning activity means cleaning, including specialised cleaning services such as disinfecting, exterminating or sterilising of objects or premises, of (i) commercial or industrial buildings and premises thereof; or (ii) factory, plant or machinery, tank or reservoir of such commercial or industrial buildings and premises thereof, but does not include such services in relation to agriculture, horticulture, animal husbandry or dairying; 16/6/2005 If cleaning activities are provided in residential buildings & offices as well as buildings in which no commercial activity (trading) or induystrial activities (manufacture/production) are carried then there is no service tax [Refer para 9 of Board circular No.B1/6/2005-TRU dated 27/7/2005]

Manpower recruitment and supply agency. S 65(68) and 65(105)(k)

(68) "manpower 7/7/1997 recruitment or supply agency means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any other person; [Substituted vide Finance Bill 2008 w.e.f. 16th May, 2008] "clearing and forwarding agent" means any person who is engaged in providing any service, either directly or indirectly, connected with the clearing and forwarding operations in any manner to any other person and includes a consignment agent; 16/7/1997

Service tax to be collected on gross value including salary paid by labor contractor even though it is reimbursable. This is a disputable issue and the matter is referred to larger Bench of Tribunal.

Clearing forwarding Agent S 65(25) and S 65(105)(j)

&

No comments are required as this case is not referred to me by the two contractors.

Transportation of goods by road services

I think elaboration on this is not necessary because normally the person who pays freight charges for transportation of goods has to pay service tax on 25 % value of the freight paid and there is no exemption for this and no thresh hold limit. Readers to read D.V.Shidhayes article Saga of summersaults in GTA service published in 2009(13) STR J 140 (STR issue of 1/3/2009). business auxiliary service means any service in relation to, (i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or (ii) promotion or marketing of service 1/7/2003

Business Aux. services S. 65(19) & 65(105)(zzb)

provided by the client; or Explanation. For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, service in relation to promotion or marketing of service provided by the client includes any service provided in relation to promotion or marketing of games of chance, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo; [Explanation inserted vide Finance Bill 2008 w.e.f. 16th May, 2008] (iii) any customer care service provided on behalf of the client; or (iv) procurement of goods or services, which are inputs for the client; or Explanation. For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, inputs means all goods or services intended for use by the client; (v) production or processing of goods for, or on behalf of the client; or (vi) provision of service on behalf of the client; or (vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include [* * * * ] any activity that amounts to manufacture within the meaning of clause (f) of

section 2 of the Central Excise Act, 1944 (1 of 1944). [Omitted vide Finance Bill 2008 w.e.f. 16th May, 2008] Explanation. For the removal of doubts, it is hereby declared that for the purposes of this clause, (a) commission agent means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person (i) deals with goods or services or documents of title to such goods or services; or (ii) collects payment of sale price of such goods or services; or (iii) guarantees for collection or payment for such goods or services; or (iv) undertakes any activities relating to such sale or purchase of such goods or services; (b) [* * * * ] [Omitted vide Finance Bill 2008 w.e.f. 16th May, 2008]

3.7. Service Tax on Works Contract

(G. Natarajan, Advocate, Swamy Associates) Though scores of movies are released in Bollywood and Kollywood, not every one becomes a super hit. Star value, story line, catchy tunes, etc. would play a major role in making a movie a super hit. Same is the case with taxable services. While the compounding confusions made the GTA levy a super hit, the hair splitting practical issues would certainly make the recently introduced Works Contract Service, as another super hit. No doubt, the levy came as a messiah to the construction industry, which was reeling under heavy burden of service tax, compounded further by denial of all forms of Cenvat Credit, if the benefit of abatements is claimed (Notification 1/2006). When both main contractors and sub contractors are sought to be taxed, on the premise that services rendered by any person to any other person are taxable, denial of service tax paid by the sub contractor to the main contractor, virtually led to double taxation. And now, the new levy is really the saviour. The scope of the definition of the term works contract covers all contracts which are hitherto classified under different services, such as commercial or industrial construction, construction of residential complex, erection, commissioning and installation. The problem of classification dispute has also been avoided, by virtue of the clarification to the effect that contracts which are recognized as Works Contract for VAT / Sales Tax purposes would be classified only under this new category of taxable service. Considering the composition scheme offering a 2 % service tax rate, as against the earlier levy @ 3.96 % (12 % on 33 % of gross amount Education

CESS not considered), the service tax liability has almost been halved. That too, with the benefit of Cenvat Credit on capital goods and input services. Kudos to the CBEC for this practical and industry friendly dispensation. But, this levy is not free from scopes for varied interpretations and practical difficulties, which would surface during the course of implementation of the levy. The million dollar question in the minds of the industry is whether they can switch over to the new levy in respect of all ongoing contracts or is it applicable only for the contracts which are to be executed only from 01.06.2007 only. The root cause of this question is Rule 3 (3) of the Works Contract (Composition Scheme for payment of service tax) Rules, 2007, which reads as under. The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract. The above provision is widely being interpreted to mean that since service tax has already been paid on the on going contracts under various other categories (commercial or industrial construction, construction of residential complex, erection, commissioning and installation), they cannot have the option of switching over the classification to Works Contract. Moreover, as per the above provision, the option is for the entire works contract and in as much as service tax has already been paid on the said contracts under different categories, the option of composition scheme cannot be exercised for such contracts, and they will continue to be taxed under the earlier classification. May I differ please? The classification of taxable services is the first step in determining ones service tax liability. As per the TRU clarification as well as on the basis of Section 65 A of the Finance Act, 1994, the ongoing contracts, which are hitherto classified under different services, will get classified only under Works Contract Service, with effect from 1st June 2007. Once the classification is thus decided, the next question is as to whether the option of composition is applicable for the contract or not. The condition reproduced above mandates that the option has to be exercised prior to payment of service tax on such works contract. Having classified the service under Works Contract, with effect from 01.06.2007, a service provider is yet to pay any service tax on such Works Contracts and he is at liberty to choose the composition scheme. Since, the levy of service tax on Works Contract itself has been introduced only with effect from 01.06.2007, the contract was even otherwise a Works Contract as per the VAT / Sales Tax provisions, is not at all of any relevance to determine the applicability of service tax. For the purpose of levy of service tax, the contract is a Works Contract only from 01.06.2007 and this fact alone is relevant to determine any connected issues. The condition to the effect that the option, once exercised, shall be applicable for the entire works contract, shall also be understood only with reference to the work to be undertaken after 01.06.2007. In other words, if a service provider opts to pay service tax on composition scheme, with effect from 01.06.2007, by classifying an ongoing contract as Works Contract, he cannot go back from that option. Thus the payment of service tax on the said activity, prior to 01.06.2007, under a different category of service is not at all relevant to opt for the composition scheme under Works Contract Service. Let us see some practical issues. Can an existing contract be switched over to Works Contract levy? (a) A construction contract for a value of Rs.5 Crores is going on. Work to the tune of Rs. 3 crores has been completed and an amount of Rs.3 crores has been realized and service tax has been paid thereon under construction service, after availing 33% abatement. Can the contractor pay service tax on the remaining Rs.2 Crores, under Works Contract Service under composition method. If so, 2 % service tax has to be paid on Rs. 2 Crores or Rs.5 Crores. As dealt with above, the service provider can very well switch over to Works Contract with effect from 01.06.2007 and opt for composition scheme. The gross amount for the purpose of this levy shall only be Rs.2 Crores, as Rs. 3 Crores has already been taxed under a different category. What if tax is paid on advance before 01.06.2007 but the work is going to be done only thereafter? (b) A service provider has received an advance of Rs.1 Crore, against a Rs.5 Crores contract and has also paid service tax on such advance, under commercial construction service. The construction activity is going to commence only after 01.06.2007. Can he classify the service under Works Contract and opt for composition scheme and seek adjustment of the service tax already paid on the advance? Value of taxable service, also includes amount received for services to be provided. So once an advance is received, the service is classified and appropriate service tax has been paid. Receipt of money, either by way of advance or otherwise, is the point

for determination of service tax liability. Once this has already been done for the advance received, switching over the classification can be done, only with reference to the remaining portion. In other words, classification under Works Contract and opting for composition scheme can be made with reference to Rs. 4 Crores only and the service tax already paid on the advance shall be final and cannot be adjusted against the Works Contract liability. An alternative can also be thought of. The service provider can cancel the existing contract and enter into a new contract. He may also repay the advance already received along with the service tax collected thereon, to his client. He may enter into a fresh contract and choose the discharge service tax liability thereon, under Works Contract Service. The service tax which has already paid on the advance received in respect of the cancelled contract can be adjusted against his any other subsequent liability, as per Rule 6 (3) of the Service Tax Rules, 1994, according to which the service tax paid in respect of any service, which has not been rendered either partly or wholly, can be adjusted against any subsequent service tax liability, if the amount collected towards and value and service tax, is refunded to the client. Considering the fact that the service tax liability under the new Works Contract Service is almost 50 % (2.06%) when compared to the existing quantum of levy under construction service (4.08% = 12.36 % on 33 % of gross amount), the exercise is certainly worth a bargain! What if the work is completed prior to 01.06.2007 but money received after 10.06.2007. (c) A commercial construction has already been completed prior to 31.05.2007. But a major part of the consideration therefor is being received only after 01.06.2007. Can the service provider pay service tax on such receipts, under Works Contract levy composition scheme? When the service was provided, it was classifiable only under commercial construction service and the levy of service tax on works contract was not at all in force then. The service was already a taxable service and only payment of service tax has not been done, as the consideration is not received. So, when such consideration is received after 01.06.2007, service tax has to be paid thereon, only by considering such service as commercial construction service and not under Works Contract service. Service tax is payable even on the advances received prior to 01.06.2007, even if the levy is effective only from 01.06.2007. (d) An EPC contract has been awarded to a service provider and he has also received an advance towards it, prior to 01.06.2007. The said contract is not covered under any of the existing taxable services, viz., construction services or erection, commissioning or installation service and hence no service tax has been paid on the advance. The work is going to be carried out only after 01.06.3007. Whether the service provider would be liable to pay service tax on the advances received prior to 01.06.2007? To attract the levy of service tax, the time when the service is rendered is important. In this case, the service is rendered after 01.06.2007 and service tax is payable on it under Works Contract service. Prior to 01.06.2007, it was not at all a taxable service. Hence, service tax has to be paid even on the advances received prior to 01.06.2007, in respect of the service. No levy, if the service was not taxable, when rendered, even if the payment is received after 01.06.2007. (e) An EPC contract has been completed prior to 01.06.2007. The said contract is not covered under any of the existing taxable services, viz., construction services or erection, commissioning or installation service. A part of the consideration of the said contract is received after 01.06.3007. Whether the service provider would be liable to pay service tax on the amounts received after 01.06.2007? The service was not at all taxable when it was rendered. So no service tax is payable, even if the consideration for the said service is received after 01.06.2007 Cenvat Credit Vis-vis Works Contract. (f) The restriction as to availment of Cenvat credit on input services and capital goods, is not applicable for Works Contract Service even when composition scheme is opted. So, the credit so far not taken, can now be taken? As per Notification 1/2006, if the benefit of abatement thereunder is claimed, no CENVAT credit can be taken in respect of the inputs, capital goods and input services used for providing such taxable service for which the abatement is claimed. If we take the example given under (a) above, since the service provider has opted for abatement, he would not have taken any CENVAT credit on his input services and capital goods so far (we can forget about inputs as they are barred even under the composition scheme for Works Contract).

If he opts to pay service tax on the Works Contract, on the gross amount minus value of transfer of property, where there is no restriction as to availment of any cenvat credit, Cenvat credit can be taken on all inputs, capital goods and input services, which will be used after 01.06.2007. If any inputs / input services / capital goods have already been used completely, Cenvat credit cannot be claimed for the same, as they have been used in providing a taxable service, for which service tax has been paid by availing abatement under Notification 1/2006. Similarly, if the service provider opts to pay service tax on composition scheme, with effect from 01.06.2007, he can take CENVAT credit in respect of the input services, which will be used after 01.06.2007 as well as capital goods. In respect of continuous services, credit can be taken proportionately, in respect of the services, which would be used after 01.06.2007. Before parting The first method of paying service tax on works contract, after excluding the value of transfer of property from the gross amount, is akin to Notification 12/2003. But, in Notification 12/2003, there is a restriction to the effect that no Cenvat credit shall be taken in respect of the goods which are being sold while rendering the service. But, such restriction is conspicuously absent in Works Contract! In other words, the service provider under Works Contract can take Cenvat credit in respect of all inputs but pay service tax after excluding the value of transfer of property in respect of the goods sold. Is this bonanza intentional?

Implications under Service Tax before 1-6-2007: The above discussion brings to light a question regarding the applicability of service tax provisions to composite contracts. Over a period of time, there has been a gradual expansion in the scope of taxable services. Some relevant service categories are listed in the table below: - Category of Service & Effective date - Consulting Engineering Services 7-7-1997 - Erection, Commissioning & Installation Services 1-7-2003 - Construction Services 10-9-2004 - Construction of Residential Complex Services 16-6-2005 - Works Contract Services 1-6-2007 Right from the time the category for taxing consulting engineering services was brought into the Statute, there were constant attempts to levy service tax on the consulting element of the composite contracts. While the 46th Constitutional Amendment permits the States to levy tax on transfer of goods involved in the execution of a works contract, no specific authorisation is available to the Centre for artific ially vivisecting such contracts for the purpose of levy of service tax and hence the Courts have consistently held that composite contracts cannot be made liable for service tax7 under the category of consulting engineering services. Since 2003, the Legislature has gradually expanded the scope of taxable services to cover various activities involving performance of work. From an industry perspective, such performance of work could be either on a stand-alone basis or as an element of a composite contract. While there were no doubts on the coverage of activity done on a stand-alone basis (labour job), there was uncertainty on the coverage of the activity done as a component of a composite works contract. The Department interpretation at that stage was to argue on the principle of aspect theory and suggest that the levy of service tax was, in principle, in order. To address the issue of valuation and cascading impact of taxes, the Department provided the following alternatives : 1. Discharge of service tax on the full value of the contract with corresponding credit of duties/taxes paid on inputs and input services 2. Discharge of service tax on the value of the service component (by identification and reduction of the value of the goods sold) with corresponding credit of taxes paid on input services 3. Discharge of service tax on a presumptive value of the service component (i.e., 33% of the gross value of the contract) with no credit of taxes paid on inputs/input services. Notwithstanding the abovementioned options, can it be argued that there really is no authority to levy a service tax at all in the absence of a specific constitutional amendment ? After all, even for levy of sales tax, a Constitutional amendment was required and it has already been held that the Constitutional amendment has only restricted applicability vis--vis sales tax laws8.

The answers to the above questions could be debatable and would depend on whether one treats a works contract as a whole as constituting an activity and therefore a service (View 1) or one looks at works contract as independent of both goods and services (View 2). In case View 1 is adopted, the levy of service tax can be said to be effective from the date the respective category for execution was introduced, say construction service. All the three alternate options for discharging the tax liability would ensure that there is no cascading effect. In case View 2 is adopted, the levy of service tax would actually require a Constitutional amendment. Before the dust could settle down on the said controversy, the judiciary was flooded with a plethora of cases wherein the Departments attempt to tax the services embedded in a composite contract was challenged. In fact, the Bangalore Tribunal went ahead and held that a composite contract cannot be vivisected to levy a tax on the erection, commissioning and installation component of the said composite contract9.

Implications under Service Tax from 1-6-2007 : In order to overcome the above controversy and specifically provide for a mechanism to tax the service component of a works contract, a new category of service was introduced with effect from 1-6-2007 to tax specified works contracts. However, as highlighted earlier, in case a view is taken that the service component is embedded within a composite contract, the composite contract cannot be vivisected merely by insertion of a taxable category of service. Hence the levy of service tax under the category of Works Contracts Services can be constitutionally challenged. If one holds the conservative view that the entire composite contract is a service, there was really no need for the introduction of the category of Works Contracts Services, since the basic categories were wide enough to cover the impugned transactions. In either of the situations, the introduction of the category of Works Contracts Services becomes redundant. The law cannot be interpreted to bring about redundancy in any of the provisions. Therefore it can be strongly argued that the levy of service tax is not constitutionally valid even after the introduction of works contract services as a category, since the Legislature does not have the authority to vivisect a composite contract. Non-Vivisection Practical Ramifications : While there is a strong legal justification to challenge the applicability of service tax on works contracts, a business needs to evaluate the position taken from a practical perspective. Being an indirect tax, any aggressive position taken can result in an opportunity cost (since the tax would have been recovered from the client in the case of a conservative position). Further, the availability of CENVAT Credit to both the service provider and service recipient (in many cases), effectively results in no additional cost on account of adoption of a conservative position. Thus, one may reconcile the position to accept the levy of service tax under the category of Works Contract Services with effect from 1 -6-2007. With the introduction of a new category to tax only specified works contracts, it can be argued that the Legislature accepts the principle that the works contracts could not be taxed under the basic category itself and therefore the new category was created. Therefore, no service tax was payable in the past periods in cases where works contract tax was payable. This view has already found favour with the judiciary10. Thus, one can safeguard the liability for the past periods.

Conclusion : The article tries to explain in a nutshell the theory of non-vivisection of composite contracts and its ramifications vis--vis levy of service tax on works contracts. It does not deal with the issues concerned with valuation and claim of credit, since they are secondary to the basic issue of levy of service tax itself. The article also does not deal with the tax implications of other types of composite contracts wherein, say, multiple services are bundled. Over a period of time, the law will evolve. It appears that a long-term solution could be to have an integrated Goods and Service Tax with a comprehensive cover-age of all supplies of goods

and services. Till the time such a GST regime is evolved, these issues will continue to present uncertainty for the industry. It is a challenge to both the profession and the business to confront and comply with uncertainty.

3.8. Note on New Service Tax Provisions for Builders & Developers
Introduction: The issue of the imposition of service tax on construction and sale of residential property has long been a matter of concern for the real estate and construction industry as well as for buyers of such residential property. It has gained much prominence after Budget 2010 because of significant amendment made therein towards taxability of sale of flats under service tax. A deemed service provision has been introduced in case of construction service w.e.f. 1-7-2010. Any industrial or commercial construction or construction of residential complex will be subject to tax if such complex or part thereof is sold prior to obtaining completion certificate. Consequently, installment purchases of immovable property will become chargeable to the service tax. Notification no. 24/2010 dated 22 June 2010 has specified the effective date of operation of certain provisions of the Finance Act 2010, which include subject amendment, to be 1 July 2010. Since the subject amendment is made by way of an Explanation, added to the Definition of service & since this Explanation is not merely for explaining or clarifying the scope but for expanding the scope of taxable service, it can be safely interpreted that this amendment can not have retrospective effect prior to 1-7-2010. Following players in real estate sector will get affected by the Amendment. A pure Developer/Builder, who might have outsourced or contracted out the construction activities to a Contractor, in the case of a civil works contract. A Developer/Builder cum Contractor, who undertakes the construction himself and consequently doubles as a Contractor. It needs to be noted however that a contractor engaged by the builder for the purpose of construction of commercial or residential complex is anyway liable to pay the service tax under the relevant taxable category. Dispute was only in respect of the liability of the builder to pay the service tax on sale of a flats during construction to the prospective buyer. Recent amendment brings into service tax net, transactions of sale effected by builders and developers. Pre-budget 2010 provisions in respect of construction service Service tax provisions relating to construction cover three types of services i. Commercial or industrial construction which is taxable w.e.f. 10-9-2004 ii. Construction of complex (residential complex of more than 12 residential units) which is taxable w.e.f. 16-6-2005. iii. If sales tax/VAT/works contract tax is payable on these construction activities, related services get covered under works contract service w.e.f. 1-6-2007 and not under first two categories of services. As far as sale of flats by builders is concerned, it was more or less settled, on basis of Court decisions and CBE&C circulars, that a builder entering into contract for sale of flat or industrial unit (gala) or shop or a developer entering into contract for construction of an individual flat for personal residential use of client are not liable to pay service tax. As a result where agreements are made with the prospective buyers, builders were mostly out of service tax net because in such cases it was considered that no service is rendered. Changes made in Budget 2010 In the Finance Act, 2010, an Explanation has been added w.e.f. 1-7-2010, to definition of commercial or industrial construction and construction of residential complex, as follows Explanation. For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a

person authorized by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer. Similar Explanation is added In case of commercial or industrial construction service, where in place of word complex, the words used are construction of a new building. As a result of this Explanation, an activity which is not service as per Court decisions and CBECs own earlier circulars will now be a deemed service for purpose of levy of service tax, under above two categories of services. Effect of the changed Provisions It is important to note that extension of scope in the definition of taxable service has been made only in respect of commercial or industrial construction and construction of residential complex service, leaving works contract service un affected by the change. For the two services covered, service tax will now be payable in cases of sales of flats/shops/galas, unless such sales are made & entire consideration is received after Completion Certificate is obtained for the property sold. Time for obtaining completion certificate thus becomes a key factor in determining taxability of sales of flats under service tax. Requirement about Completion Certificate is however somewhat relaxed under the Service Tax (Removal of Difficulty) Order, 2010, made effective from 1.7.2010, whereby it is provided that such Certificate can be obtained either from a. Any Government Authority including Local Authority b. An Architect registered with the Council of Architecture c. Chartered Engineer d. Licensed surveyor of the respective local authority Thus even after the amendment, to remain out of service tax net, a builder need not wait for sale of flats till Completion Certificate is obtained from Local Authorities but instead can obtain such certificate from an Architect or Chartered Engineer and can still avoid charge of service tax. In all other cases, where such completion certificate is not obtained before sale of flats, the builder will be liable to pay the service tax. In most of the cases, builder constructs building by using funds from prospective buyers, paid by them on the basis of Bookings made for major part of such building before its completion. Thus except for few flats reserved for sale at higher price on ready possession basis, for most of the flats sold, service tax will become applicable. Exclusion of Works contract service from the Amendment As discussed above, even after the amendment, what is deemed to be a service is only construction of commercial buildings or residential complexes. This is because Amendment inserting Explanation is not made in the definition of works contract service, but only in other two construction related services. The amendment therefore does not apply if the contract is covered under works contract service i.e. where Vat/Sales tax is payable on the contract. Thus if a particular construction activity by a builder is covered under VAT provisions, service tax will not be payable on such construction even after the amendment. Pre Budget legal position about non applicability of service tax in case of sale of flats will therefore still hold good even a fter the amendment in case of works contracts for construction. Exclusion when construction service is provided for personal use of buyer. Residential complex for service tax purposes does not include a complex which is constructed by a person directly engaging any other person for designing/planning/construction and is intended for personal use as residence by such person. The definition also explains that personal use includes promoting use of such property as residence by another person on rent or even without consideration. In this connection, National Building Construction Corporation Limited (NBCC) requested the CBEC for a clarification on the applicability of service tax on construction of residential houses for Central Government employees. In this case Ministry of Urban Development (GOl) has directly engaged the NBCC for constructing residential complex for central government officers. Further, the residential complexes so built are intended for the personal use of the GOI which includes promoting the use of complex as residence by other persons (i.e. the Government officers or the Ministers). As such the GOl is the service receiver and NBCC is providing services directly to the GOl for its personal use. Therefore, as for the instant arrangement between Ministry of Urban Development and NBCC is concerned, Board has clarified vide F.No.332/16/2010-TRU Dated: 24, May 2010 (after the Budget 21010 Amendment) that the service tax is not leviable. In the above clarification, if NBCC and Government are replaced by builder and individual buyer, it would mean that if an individual buyer is buying the property for his personal use from builder, then the transaction of sale is not covered under Service Tax. Clear clarification from CBEC is required on this interpretation, because the clarification referred to above has not been placed by CBEC in public domain.

Transitory provisions in case of bookings made/agreements executed prior to 1.7.2010 Date of booking is not relevant. Date of provision of service is relevant as provision of service is the taxable event. Hence, if construction service is provided after 1-7-2010, service tax will be payable. Transitory provisions in case of constructions started prior to 1.7.2010 If the construction is partly complete on 1-7-2010, service tax liability shall be ascertained as under. Principally, provision of service is the taxable event, i.e. services provided after tax is imposed will be taxable. Thus, service tax will apply in respect of services provided or to be provided on or after 1-7-2010. Receipt of payment or advance is not relevant for determining tax liability. Thus, a builder/developer is not liable to pay service tax in respect of services provided unto 1-7-2010. Such bifurcation is possible only if the builder/developer keeps proper accounts and records. Running bills can be issued in respect of services provided up to 1-7-2010, backed by a Certificate from Architect/Chartered Engineer regarding stage of completion of construction covered by such bills raised. Transitory provisions in case of advance payments made by the customer prior to 1.7.2010 A specific exemption from service tax has been provided for advances received prior to 1.7.2010 vide Notification No. 36/2010 dt. 28.6.2010. As per Notification service tax is not payable on the amount of advance payment received before the 1.7.2010, for taxable services to be provided, on or after 1.7.2010. Thus exception has been made for the advances received from the customers before 1.7.2010, even though construction service related to such advances is to be provided after the service has become taxable. It should be noted however that this exemption is limited to amounts received as advance before 1.7.2010. For all subsequent advances liability will arise towards service tax as per normal provisions. Service tax is payable on receipt basis and hence as one gets payment for construction service from customer, one has to pay service tax on that amount. If service tax is not shown separately in bill or amount received, the amount received should be taken as inclusive of service tax and then back calculations may be made. Rate of service tax Service tax is payable on gross value of taxable services @ 10.3% (Service tax 10%, plus education cess of 2% plus SAH education cess of 1%). Basic exemption for service tax The exemption is Rs 10 Lakhs in first year of taxable service counting from 1-7-2010. If turnover in 2010-11 exceeds Rs 10 Lakhs, then there is no exemption and tax is payable on all services from 1st April 2011 onwards. Valuation of service & Calculation of Service Tax Liability for a Builder/Developer Principally, service tax is payable on value of taxable services. Thus, if a service provider has proper costing records, it is permissible to deduct value of material and land (or calculate value of service on cost plus profit basis) and pay service tax on value of service @ 10.30%. Developers and Builders have following alternative methods available under the service tax law for payment of service tax liability. If the service is covered under service of construction of commercial buildings or residential complexes, builder can opt for Abatement Scheme applicable to these services, under which service tax is to be paid on 25%/33% of the gross value received, in terms of Notification 1/2006. Alternatively, they can opt to pay service tax under Notification No. 12/2003-ST dated 20-06-2003, as per which, the service provider is exempted from paying service tax on the value of goods sold/transferred. The benefit of this Notification is very much available to Developers/Builders/Works Contractors. With effect from 1.7.2010, any person providing taxable service of commercial or industrial construction or construction of residential complex (except completion and finishing services like glazing, plastering, painting, tiling, wood and metal joinery and carpentry, swimming pools, acoustic applications etc.) can opt to pay service tax as follows (a) on 33% of gross amount charged if the gross amount does not include value of land (b) on 25% of gross amount charged if the gross amount includes value of land (Till 1-7-2010, the 25% scheme was not available. Only 33% scheme was available). The gross amount should include value of goods and materials supplied or provided or used. Thus, if the customer provides some material, its value will have to be added for purpose of payment of service tax. Conditions for this concession are (a) No Cenvat of duty/service tax paid on inputs, input services and capital goods and (b) No benefit of Notification No. 12/2003-ST dated 20-6-2003 If a project is covered under Works Contract service, (where VAT is paid) the Realty players can opt to pay service tax either under Notification No. 12/2003-ST dated 20-06-2003, or under the Composition Scheme, applicable to works contractors.

Though the Department has been taking a view that the benefit of Notification 12/2003-ST dated 20-06-2003 cannot be extended to Developers and Builders, the Bangalore CESTAT, in the case of Sobha Developers Ltd v. CCE & ST (2009-TIOL-1188-CESTAT-BANG) has categorically held that the Developer is entitled to the benefit of Notification No. 12/2003. The service provider can have benefit either under Notification 12/2003-ST or 1/2006-ST and not both. Important aspects for choice between the Alternatives available to Builder for Payment of Service Tax Comparative features of different alternatives are as under. Issue Options of Abatement/Composition or Notification 12/2003 are available in respect of each of the contracts. It can be said that there are as many works contracts as there are flats, in a housing project. As for choice between the alternatives, Developers who have contracted out the construction activity can find Notification No. 12/2003 or the Composition Scheme for Works Contractors more beneficial looking at significant benefit arising out of availment of CENVAT credit. The 25% scheme is simple but the liability of service tax will be high, particularly at places where land costs are very high. Further Cenvat credit of service tax paid to contractor/sub-contractor is not available. Different options for different contracts can be adopted depending upon the amount of tax liability under each option. Each contract can be treated as separate contract and valued differently. Service tax liability on consideration received from Landlord Where land is received from the land owner by the builder in consideration of some flats/galas to be given later in lieu of the land, service tax is payable on the value of flats offered to the landlord. As soon as builder gets possession of land from land owner, it is advance received and service tax will become payable next month. In such case, value of service will have to be found out on basis of value of service of identical or similar flat/shop or on basis of cost of construction plus reasonable profit. Provisions with respect to Cenvat Credit Cenvat credit on construction activities of one project can be adjusted towards output service tax on sale of another project, provided both the projects are not covered under composition option (25%/ 33%) As per rule 6 of Cenvat Credit Rules, Cenvat credit is not available if output service is exempt from service tax. Subject to this restriction, Cenvat credit among various projects is indeed inter-changeable, particularly if one opts for centralized registration. Credit of service tax paid on various input services like telephone, courier, mobile, bank charges, audit, security, catering etc can be utilized against service tax payable on construction services. However if certain projects are covered under composition option, pro rata credit will get disallowed as per provisions of rule 6 of Cenvat Credit Rules Refund of Service Tax on Booking Cancellation If Service tax has been charged to customer on the basis of booking and deposited with department & later on booking is canceled by the customer, refund of service tax paid earlier can be made to him. Amount of service tax so refunded can be adjusted against the subsequent payments of service tax. As per rule 6(3) of Service Tax Rules, if excess tax is paid, in respect of service which is not provided either wholly or partially for any reason, the excess service tax paid can be adjusted against service tax payable for subsequent period, if the value of services and tax thereon is refunded to the person from whom it was received. Registration A builder can either take separate service tax registration for each project or have centralized registration after studying pros and cons. If proper records etc. are kept, centralized registration will be preferable. It may be advisable to register each project separately in following cases (a) If some services are exempt and some taxable or (b) valuation basis for each project is expected to be different,. Tax payable only by a Builder

If a customer who has purchased a flat/commercial unit/industrial gala/shop from builder/developer, sells it before Completion Certificate, such sale is not laible under service tax The words used in the Explanation are by the builder or a person authorized by the builder. A customer is not a person authorized by builder to enter into contract for construction. Hence, a customer cannot fall within that definition. Even otherwise, service tax is payable on value of taxable service which has already been paid by builder/developer. Even if the customer sales the flat or unit or shop at higher price, it does not mean that cost of construction has increased. Preferential location and development of complex service Note on New Service Tax Provisions for Builders & Developers As per section 65(105) (zzzzu) of Finance Act, 1994, any service provided or to be provided, to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorized by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place, is a taxable service. Explanation. For the purposes of this sub-clause, preferential location means any location having extra advantage which attracts extra payment over and above the basic sale price. CBE&C, has clarified as follows (Annexure- A to JS (TRU-II) D.O. letter F. No.334/1/2010-TRU dated 26-2-2010) It has been reported that in addition to these activities, the builders of residential or commercial complexes provide other facilities and charge separately for them and these charges do not form part of the taxable value for charging tax on construction. These facilities include,-(a) prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastuhaving the bed room in a particular direction; Number- lucky numbers); (b) internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc; (c) fire-fighting installation charges; and (d) power back up charges etc. Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service. Charges for providing parking space have been specifically excluded from the scope of this service. Development charges, to the extent they are paid to State Government or local bodies, will be would be excluded from the taxable value levy. Further, any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their members would not be taxable under this service. Immediate Steps to be taken by a builder/developer Apply for registration within 30 days. Prepare and submit running Bills till cut off date i.e. 1 -7-2010, backed by Architect Certificate for the construction completed up to 1.7.2010 Make full disclosure about construction value not offered to service tax so as to avoid penalty for suppression of facts.

3.9. 1. No Cenvat credit if final product/service exempt Cenvat credit is not available if inputs or input services are used for manufacture of exempted goods or provision of exempted output services. As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product or output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed. As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or provision of exempted services. Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available. Partial manufacture/provision of exempted products/services Cenvat credit of inputs and input services is not available if final product/output service is exempt from excise duty/service tax. In case of manufacturer manufacturing both exempt and dutiable goods (or service provider providing taxable as well as exempt services), it may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services. In such cases, the manufacturer/service provider has following four options w.e.f. 1-4-2011 (a) Maintain separate inventory and accounts of receipt and use of inputs and input services used for exempted goods/exempted output services Rule 6(2) of Cenvat Credit Rules

(b) Pay amount equal to 5% of value of exempted goods (if he is manufacturer) and of value of exempted services (if he is service provider) Rule 6(3)(i) [The amount payable was 6% of value of exempted services during the period 7-9-2009 to 31-3-2011]. (c) Pay an amount equal to proportionate Cenvat credit attributable to exempted final product/ exempted output services, as provided in rule 6(3A) Rule 6(3)(ii) of Cenvat Credit Rules (d) Maintain separate accounts for inputs and pay amount as determined under rule 6(3A) in respect of input services - Rule 6(3)(iii) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011. Cenvat credit on capital goods If capital goods are partly used for exempted goods and party for dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of duty on capital goods is not allowable only when it is exclusively used for manufacture of final products [rule 6(4)] No reversal or payment of amount in certain cases If excisable goods are removed to SEZ, EOU, EHTP, STP, UN agencies or for exports or removal of gold or silver arising in manufacture of copper or zinc by smelting, payment of 5% amount is not required [rule 6(6)]. Cenvat credit of service tax in case of supplies made by DTA to EOU - Supplies from DTA to EOU are entitled to Cenvat credit of service tax paid para 6.11(v) of FTP.

Maintaining Separate Accounts of Input and Input Services 1-1 Rule 6(2) of Cenvat Credit Rules as recast w.e.f. 1-4-2011 elaborates how records in respect of exempted goods ad exempted services shall be maintained. (a) the receipt, consumption and inventory of inputs used- (i) in or in relation to the manufacture of exempted goods; (ii) in or in relation to the manufacture of dutiable final products excluding exempted goods; (iii) for the provision of exempted services; (iv) for the provision of output services excluding exempted services. Assessee shall take CENVAT credit only on inputs under sub-clauses (ii) & (iv) of clause (a). (b) the receipt and use of input services- (i) in or in relation to the manufacture of exempted goods and their clearance upto the place of removal; (ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance upto the place of removal; (iii) for the provision of exempted services; and (iv) for the provision of output services excluding exempted services, Assessee shall take CENVAT credit only on input services under sub-clauses (ii) and (iv) of clause (b). 1.1A Overriding special provisions for payment of amount in respect of banking and insurance services In respect of banking service [section 65(105)(zm)], the Bank or NBFC is required to pay amount equal to 50% of Cenvat Credit availed on inputs and input services [Rule 6(3C) of Cenvat Credit Rules as inserted w. e.f. 1-4-2011]. In respect of general insurance services [section 65(105)(zx)] and life insurance service [section 65(105)(zzzza)], amount payable is equal to 20% of Cenvat credit availed on inputs and input services in the month [Rule 6(3C) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011]. These are overriding provisions irrespective of any provision in rule 6(1), 6(2) and 6(3). The purpose of the overriding provisions has been explained in Annexure C to MF(DR) DOF No. 334/3/2011TRU dated 28-2-2011 as follows Para 1.16 A substantial part of the income of a bank or a life insurance company is from investments or by way of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be

equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers. Payment of amount or reversal not required in case of supplies to SEZ unit or developer 1-2 Payment of amount or reversal of Cenvat credit is not required in case the taxable service is provided to SEZ Unit or SEZ developer for their authorised operations. These are overriding provisions irrespective of any provision in rule 6(1), 6(2), 6(3) and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-4-2011]. 1-3 Provisions relating to option Option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year Explanation I to Rule 6(3) - reiterated in para 2 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008. Education cess and SAH education cess is payable only on duties of excise. Amount is not duty. Hence, education cess or SAH education cess is not payable on such amount. The amount should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008. 1-4 Option is to person availing Cenvat credit Rule 6(3) uses the words if manufacturer or provider of output service opts not to maintain separate accounts. Thus, whether to maintain separate accounts or not is at the option of person availing Cenvat credit. He cannot be compelled to maintain or not maintain separate accounts. The option is with assessee and he cannot be forced to maintain separate inventory under rule 6(2) Tahir Ali Industries v. CCE (2006) 195 ELT 225 (CESTAT). 1-5 Meaning of exempted goods As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty and the goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated 1st March 2011 is availed [The words in italics have been inserted w.e.f. 1-4-2011]. Exempted goods do not mean non-excisable goods - Goods which are not mentioned in Tariff are not exempted goods as they are neither goods chargeable to 'Nil' duty as per Tariff nor goods which are exempt by a notification issued under section 5A. 'Exempted goods' do not cover goods which are not excisable at all, i.e. which are not included in Central Excise Tariff at all. Such goods are not 'exempted goods'. Similarly, goods not specified in tariff at all are not goods 'chargeable to 'Nil' rate of duty'. Thus, rule 6(2) applies only if all the final products are 'excisable goods'. The rule does not apply if one of the products is not 'excisable goods' at all. Goods which are not 'excisable goods' cannot be said to be exempt from duty or chargeable to Nil rate of duty. view confirmed in CCE v. Kesar Enterprises Ltd. 2001(130) ELT 93 (CEGAT). 1-6 Meaning of exempted services As per rule 2(e) of Cenvat Credit Rules, exempted services means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken. Explanation For removal of doubts, it is hereby clarified that exempted services includes trading [Words in italics inserted w.e.f. 1-4-2011] Services on which no tax is payable are also exempt services - - For purpose of the definition of exempted services, services on which no service tax is leviable are also exempted services. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be exempted service for purpose of rule 6. It has been clarified that export of service will not be treated as exempted service - para 6 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008. 1-7 Manufacturer/service provider engaged in trading So far, there was no specific in respect of manufacturers/ service providers engaged in trading goods. Rule 2(e) of Cenvat Credit Rules as amended w.e.f. 1-4-2011 states that exempted service includes trading. As per Explanation I to Rule 6(3D) inserted w.e.f. 1 -4-2011, in case of trading, value of exempted service shall be the difference between the sale price and the purchase price of the goods traded.

In my view, this provision is reasonable and should apply to period prior to 31-3-2011 also. 1.8 Calculation of 'value' for purposes of rule 6(3) and 6(3A) As per Explanation I to Rule 6(3D) inserted w.e.f. 1 -4-2011, Value for the purpose of rules 6(3) and 6(3A) of Cenvat Credit Rules (a) shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made there under or, as the case may be, the value determined under section 3, 4 or 4A of the Excise Act, read with rules made thereunder. (b) in the case of a taxable service, when the option available under sub-rules (7), (7B) or (7C) of rule 6 of the Service Tax Rules, 1994, or the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 has been availed, shall be the value on which the rate of service tax under section 66 of the Finance Act, read with an exemption notification, if any, relating to such rate, when applied for calculation of service tax results in the same amount of tax as calculated under the option availed; or (c) in case of trading, shall be the difference between the sale price and the purchase price of the goods traded. The effect of this change has been explained in Para 1.15 of Annexure C to MF(DR) DOF No. 334/3/2011-TRU dated 28-2-2011, as follows 1.15 For the purpose of applying the formula under rule 6(3A) the value of trading service as well as value of services covered by composition schemes has been defined. The value of trading service shall be the difference between the sale price and purchase price of goods. The value in respect of services covered by a composition scheme will be tax amount divided by the rate of service tax applicable under section 66 read with any general exemption. As the prevalent rate is 10% the value shall be ten times the amount of service paid or payable. 3.10.

2. Exceptions to proportionate disallowance of Cenvat Credit

Following are the exceptions to provision of proportionate removal of Cenvat credit or payment of 5% amount. 2-1 Dis-allowance of Cenvat of capital goods only if used exclusively for exempted final product/services Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not eligible [rule 6(4)]. If capital goods are partly used for taxable services or dutiable final products, Cenvat credit will be available. Some manufacturers are entitled to exemption based on turnover or quantity (e.g. SSI units). They will be entitled to Cenvat on capital goods. They can take Cenvat on capital goods and utilise it for payment of duty when their exemption limit is crossed. Inputs used in manufacture of capital goods used within the factory Notification No. 67/95-CE exempts capital goods manufactured within the factory and used within the factory. In such case, a view is possible that amount is payable on such capital goods. However, since the goods are not sold, there is no question of any price and hence no amount should be payable. 2-2 Some services were eligible even if partly used for manufacture of exempted goods/output services Rule 6(5) of Cenvat Credit Rules provided that in case of specified services, full Cenvat credit of input service is available even if these services are partly used in manufacture of exempted final product/output services. This sub-rule has been omitted w.e.f. 1-4-2011. Thus, now the rovision of proportionate reversal applies to all the input services. 2.3 Supply to EOU/SEZ, export of goods, deemed exports or gold manufacture Rule 6(6) of Cenvat Credit Rule states that provisions of rules 6(1), 6(2), 6(3) and 6(4) are not applicable , if excisable final product is despatched without payment of duty, in following cases  Final product is despatched to SEZ, EOU, EHTP or STP (Actually, supply to SEZ is export and not deemed export).  Final product is supplied to United Nations or an international organisation for their official use or supplied to projects funded by them, which are exempt from duty.

 When final product is exported under bond without payment of duty  Gold or silver arising in course of manufacture of copper or zinc by smelting.  Goods supplied against International Competitive Bidding in terms of Notification No. 6/2006-CE dated 1-3-2006 or earlier Notification No. 6/2002-CE dated 1-3-2002, if such goods are exempt from customs duty when imported in India In such case, assessee need not reverse Cenvat credit or pay any amount If final product is exported, Cenvat credit cannot be denied CCE v. VVF Ltd. (2006) 195 ELT 57 (CESTAT). International competitive bidding - The last clause has been added w.e.f. 28-1-2005, with intention to exempt goods supplied against International Competitive Bidding as specified in Notification No. 6/2006-CE dated 1-32006 (Earlier Notification No. 6/2002-CE dated 1-3-2002). Payment of amount or reversal not required in case of provision of taxable service to SEZ unit or developer - Payment of amount or reversal of Cenvat credit is not required in case the taxable service is provided to SEZ Unit or SEZ developer for their authorised operations. These are overriding provisions irrespective of any provision in rule 6(1), 6(2), 6(3) and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-4-2011]. 3.11.

3. Payment of amount on exempted final product/exempt services

Assessee can opt to pay amount of 5% of value of exempted final product or value of exempted services [rule 6(3)(i)]. The amount should be paid in accounting code applicable to service tax i.e. 0044 - para 4 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008. Education cess not payable - Education cess and SAH education cess is payable only on duties of excise. Amount is not duty. Hence, education cess and SAH education cess is not payable on such amount. Nature of the payment of amount - The payment of amount is really in nature of reversal of Cenvat credit availed on inputs/input services which have been used for manufacture of exempted goods or provision of output services. 3-1 Job worker doing job work under Cenvat may be liable to pay 5% amount Job work done under Cenvat provisions is exempt from service tax. If the job worker is not availing any Cenvat credit of any common input or input services, question does not arise. However, if the job worker is availing Cenvat credit on inputs or input services, he will be liable to pay 5% amount on job charges under rule 6(3) of Cenvat Credit Rules, or he may have to go in for proportionate reversal of Cenvat Credit as per rule 6(3A) of Cenvat Credit Rules. If the job worker thinks that the rule 6(3A) is cumbersome, it may be advisable to pay service tax @ 10.30% on job charges, since the customer will be in a position to avail Cenvat credit. If job worker charges 5% amount, buyer cannot avail Cenvat credit, but if job worker charges regular service tax, the customer will be eligible to avail Cenvat credit. 3-2 No Cenvat credit of such amount paid The amount paid on the exempted final product is not in the nature of excise duty. Hence, department has clarified that buyer of such exempted goods will not be allowed to avail Cenvat credit of amount paid by the manufacturer/service provider. - MF(DR) circular No B-42/1/96-TRU dated 27.9.1996. The view has been confirmed in Malviya Chem v. CCE 2001(127) ELT 274 (CEGAT), where it has been held that Nil duty and exemption cannot co-exist with duty payment. 3-3 When to pay the amount Para 30(a) of D. O. F. No. 334/1/2007-TRU dated 28-2-2007, issued by Shri Gautam Ray, Joint Secretary, TRU, Ministry of Finance states as follows - An explanation has been inserted in rule 8 to provide that for the purposes of this rule, the expressions 'duty' or 'd uty of excise' shall also include the 'amount' payable in terms of the CENVAT Credit Rules, 2004. Therefore, all amount payable like payment under rule 6 (3) of the CENVAT Credit Rules, 2004 etc., can be paid along with duty payable by 5th or 15th of the next month.

3.12. 4. Reversal of credit or payment of amount means Cenvat credit not availed
Sometimes, assessee may take Cenvat credit by mistake or because he cannot identify the material to be used for exempted final products. This does not mean that he cannot rectify and must pay 10% amount. He can rectify by reversing Cenvat credit. Cenvat Credit Rule 6(3D) as inserted w.e.f. 1-4-2011 specifically provides that payment of amount under rule 6(3) of Cenvat Credit Rules means Cenvat credit has not been taken, for the purpose of an exemption notification wherin any exemption is granted on the condition that no Cenvat credit of input and input services shall be taken. Even earlier, Courts have been taking the same view, as discussed below. In CCE v. Bombay Dyeing Ltd. (2007) 10 STT 286 = 215 ELT 3 (SC), it was held that even when Cenvat credit is taken, if it is reversed before utilization, it would mean that Cenvat credit has not been taken. In view of the decision, CBE&C vide its circular No. 858/16/2007-CX dated 8-11-2007, has clarified that if Cenvat credit is reversed before utilization, it would amount to credit not having been taken. In Chandrapur Magnet Wire v. CCE 1996(2) SCC 159 = 1996(81) ELT 3 (SC), it was held that if Cenvat credit taken is reversed, it means no Cenvat credit has been taken. This judgment was on the basis of a specific Board circular, but principle can still apply. In Punjab Tractors Ltd. v. CCE 2005 (181) ELT 380 (SC 3 member bench), assessee paid duty on exempted parts, availed Cenvat and reversed it when utilising it for exempted final product (junior tractors of less than 25 HP). It was held that the procedure followed was revenue neutral and hence duty is not payable. However, penalty was held valid for violation of rules.

3.13.

5. Proportionate reversal of Cenvat Credit

If assessee intends to pay amount on proportionate basis (and not at flat rate of 5% on exempted goods and services), he has following two options w.e.f. 1-4-2011. (a) Pay an amount equal to proportionate Cenvat credit attributable to exempted final product/ exempted output services, as provided in rule 6(3A) Rule 6(3)(ii) of Cenvat Credit Rules (b) Maintain separate accounts for inputs and pay amount as determined under rule 6(3A) in respect of input services - Rule 6(3)(iii) of Cenvat Credit Rules as inserted w.e.f. 1 -4-2011. The option (b) above was not available upto 31-3-2011. He has to pay amount provisionally on monthly basis, At the year end, he has to calculate exact amount and ay difference if any or adjust excess paid. 5-1 Inform option to Superintendent The assessee should inform following details to Superintendent, while exercising the option of proportionate reversal [Rule 6(3A)(a)]  name, address and registration No. of the manufacturer of goods or provider of output service.  date from which the option under this clause is exercised or proposed to be exercised.  description of dutiable goods or taxable services.  description of exempted goods or exempted services.  CENVAT credit of inputs and input services lying in balance as on the date of exercising the option under this condition. Such option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year Explanation I to Rule 6(3) inserted w.e.f. 1-4-2008. If assessee intends to pay 5% amount on exempted final products/exempted final services, such intimation is not required.

3.14. 5-2. Mode of calculations of proportionate reversal The mode of calculation is as follows Assessee should first take entire Cenvat credit of inputs and input services used in exempted as well as taxable final products and exempted as well as taxable services. Calculation of amount to be reversed- At the end of month, assessee should calculate Cenvat credit attributable to exempted final products and exempted services on provisional basis, as follows Amount to be reversed at end of month (1) Rule 6(3A)(b)(i) Inputs used for exempted final products (2) Inputs used for exempted services (On proportionate basis, based on ratio of Rule 6(3A)(b)(ii) previous year) (3) Rule 6(3A)(b)(iii) Input services used for exempted final products and exempted services (On proportionate basis based on ratio of previous year). Total 1+2+3 = amount to be reversed every month on provisional basis Calculations at the end of the year - At end of the year, assessee should calculate the ratios on actual basis and make fresh calculations and pay difference, if any, before 30th June. If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit. Reversal in first year of production or service only at the end of year - In the first year of production or provision of services, ratios of previous year will not be available. In that case, the calculations need not be made for the whole year. However, calculations should be made after the year is over and amount attributable to Cenvat credit on exempted final products and exempted services should be calculated and paid. The basic idea behind the mode of calculations is sound and correct as per Vat principles. However, calculations are not easy and are prone to litigation. There is no provision to calculate input services used exclusively for exempted services. This has to be done on ratio basis only. 5-3 Calculation of amount on provisional basis every month The manufacturer of goods or the provider of output service shall determine and pay, provisionally, for every month Inputs used for exempted final products - The amount equivalent to CENVAT credit attributable to inputs used in or in elation to manufacture of exempted goods during the month, denoted as A. This has to be done on basis of input-output ratio or on basis of formula similar to the one applicable in case of inputs for exempted services on provisional basis. Inputs used for exempted services - The amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional) is to be calculated as follows B C Total value of exempted services provided during the preceding financial year Total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the preceding financial year Total CENVAT credit taken on inputs during the month minus A (i.e. credit taken on inputs for manufactured final products) Amount to be reversed every month on provisional basis as per rule 6(3A)(b)(ii)

D (B/C) x D

Input services used in or in relation to manufacture of exempted goods or provision of exempted services The amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) is calculated as follows E F G (E/F) x G Total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year Total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year CENVAT credit taken on input services during the month Amount to be reversed every month on provisional basis as per rule 6(3A)(b)(iii)

5-4 Calculation of final amount after year end The manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the following manner [Rule 6(3A)(c)] Inputs used for exempted final products - The amount of CENVAT credit attributable to inputs used in or in relation to manufacture of exempted goods, on the basis of total quantity of inputs used in or in relation to manufacture of said exempted goods during the financial year, denoted as H [Rule 6(3A)(c)(i)]. This has to be done on basis of input-output ratio and/or on basis of formula similar to the one applicable in case of inputs for exempted services on actual basis. Inputs used for exempted services- The amount of CENVAT credit attributable to inputs used for provision of exempted services is to be calculated finally on actual basis as follows J Total value of exempted services provided during the financial year K Total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the financial year L Total CENVAT credit taken on inputs during the financial year minus H (i.e. credit taken on inputs for manufactured final products) (J/K) x L Amount to be reversed finally as per rule 6(3A)(c)(ii)

Input services used in or in relation to manufacture of exempted goods or provision of exempted services The amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services is to be calculated on actual basis as follows M Total value of exempted services provided plus the total value of exempted goods manufactured and removed during the financial year N Total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the financial year P CENVAT credit taken on input services during the financial year (M/N) x P Amount to be reversed finally at end of year as per rule 6(3A)(c)(iii)

Amount of Cenvat credit to be reversed for whole year - Amount of Cenvat credit attributable to exempted goods and exempted services is to be determined at the end of financial year. The amount is to be calculated as follows Total amount of Cenvat credit attributable to exempted goods and exempted services for the financial year . . . . . . (1) Rule Cenvat on Inputs used for exempted final products 6(3A)(c)(i) (2) Rule Cenvat Credit on Inputs used for exempted services (On proportionate 6(3A)(c)(ii) basis, based on actual ratio of financial year) (3) Rule Cenvat Credit on input services used for exempted final products and 6(3A)(b)(iii) exempted services (On proportionate basis based on actual ratio of financial year). (4) Rule 6(5) Cenvat credit on services specified in rule 6(5), which are exclusively used for exempted goods or exempted services Total 1+2+3+4 = Total amount attributable to exempted final products and exempted services

5-5 Payment of difference if short payment was made At the year end, the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per rule 6(3A)(c) and the aggregate amount determined and paid as per Rule 6(3A)(b), on or before the 30th June of the succeeding financial year, if the amount provisionally paid was lower than the amount finally determined at the year end [Rule 6(3A)(d)].

Interest payable if amount was short paid - In addition to the amount short-paid, the assessee will be liable to pay interest at the rate of twenty-four per cent per annum from the due date, i.e., 30th June till the date of payment, where the amount short-paid is not paid within the said due date. Thus, no interest is payable if difference is paid by 30th June of the following year [Rule 6(3A)(e)]. 5-6 Intimation of details to Range Superintendent The manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, the following particulars details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole financial year, determined provisionally  CENVAT credit attributable to exempted goods and exempted service for the whole financial year, finally determined  amount short paid determined alongwith the date of payment of the amount short-paid  interest payable and paid, if any, on the amount short-paid [Rule 6(3A)]. 5-7 Self adjustment of excess amount was paid If at the year end, it is found that the amount provisionally paid was more than the amount finally determined, the manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount [Rule 6(3A)(f)]. Intimation of details to Range Superintendent- The manufacturer of goods or the provider of output service shall intimate to the jurisdictional Superintendent of Central Excise, within a period of fifteen days from the date of payment or adjustment, the following particulars 1. details of CENVAT credit attributable to exempted goods and exempted services, monthwise, for the whole financial year, determined provisionally 2. CENVAT credit attributable to exempted goods and exempted service for the whole financial year, finally determined 3. amount excess paid 4. credit taken on account of excess payment, if any [Rule 6(3A)(g)]. 5-8 If assessee does not manufacture dutiable goods or does not render taxable services If assessee does not manufacture dutiable final products or taxable output service, he can take credit but is not required to pay proportionate amount on provisional basis as provided in rule 6(3A)(b). However, at year end, he should pay amount on proportionate before 30th June [Rule 6(3A)(h)]. The provision applies in case of production in first year when ratios of the previous year are not available to calculate Cenvat attributable to exempted products and exempted services. If the amount is not paid by 30th June, interest is payable @ 24% after 1st July [Rule 6(3A)(i)]. 5-9 Calculation of Value of exempt goods or exempt services Value for the purpose of rules 6(3) and 6(3A) shall have the same meaning assigned to it under section 67 of the Finance Act, 1994 read with rules made thereunder or, as the case may be, the value determined under section 4 or 4A of the Central Excise Act, 1944 read with rules made thereunder [Explanation I to rule 6(3A)] Thus, value is to be calculated as per provisions of Central Excise Act (in case of manufactured products) and Finance Act, 1994 (in case of service tax). In case of goods chargeable to specific rate of duty, value shall be determined under section 4. In case of (partially)exempted services, value shall be gross amount charged for providing exempted services, without abatement - para 3 CBE&C Circular No. 868/6/2008-CX dated 9-5-2008. 5-10 Cenvat credit in case of export of services If the services are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for payment of duty on other products or service tax on other services. If this is not possible, he can get refund [see rule 5 of Cenvat Credit Rules].

Meaning of export of services As per explanation to rule 5, output services which are exported means any output service exported in accordance with the Export of Services Rules, 2005. 5-11 Recovery of the amount If assessee does not pay the amount as provided in rule 6(3) or rule 6(3A), it can be recovered along with interest under rule 14 of Cenvat Credit Rules, as if it is a credit wrongly taken Explanation III to rule 6(3A)

3.15. Liability of Sub-Contractors when main contractor is exempt fromservice tax

Sub-contracting is very common in business particularly in construction industry. Rather, contractor himself executing the contract is uncommon in construction industry! There are many situations where the construction work is exempt. Sub-contractors often assume that they are exempt from service tax too. However, this view is usually not accepted by the department. Recent circular dated 23-8-2007 issued by CBE&C has added fuel to the fire. In this article, the issues arising out of the circular are discussed. 1. Background Construction service is taxable only if it is commercial or industrial. Noncommercial construction like construction for Government, non-profit organisations like Educational Institutions, religious places etc. is not taxable. Construction services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams have been excluded from definition of construction service itself. Construction services provided within SEZ to SEZ unit or SEZ developer are exempt vide Notification No. 17/2011-ST dated 1-3-2011 (Earlier Notification No. 9/2009-ST dated 3-32009). Construction of residential complex service provided to Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana is fully exempt from service tax [Notification No. 28/2010-ST dated 22-6-2010]. It is normal practice in construction industry to give work to sub-contractor. It may either be a back to back contract or some part of construction work is entrusted to sub-contractor. In such case, issue arises about tax liability of such sub-contractor. 1.1 Earlier department circulars that intermediary not liable to service tax Earlier, Department had clarified that a service provided to person in same category is not taxable e.g. service provided by architect to another architect, as the principal person providing service is liable to pay tax. However, service tax would be required to be paid in case of sub-contracting to a different service category e.g. architect providing service to consulting engineer or a market research agency providing service to an advertising agency even if the consulting engineer/advertising agency pays service tax on total bill which includes amount paid to provider of sub-contract Pune-I Commissionerate TN 8/98-ST dated 13-10-1998 parallel Indore Commissionerate TN 5/98-ST dated 14-10-1998. In view of these instructions, in Synergy Audio Visual Workshop v. CST (2008) 14 STT 321 (CESTAT), it was held that when main advertising agency has paid service tax, subcontractor is not eligible same view in Ruth Shipping Agencies v. CCE (2010) 26 STT 438 (CESTAT SMB). These circulars have been withdrawn vide Para 6 of CBE&C Circular No. 96/7/2007ST dated 23-8-2007. 1.2 Subsequent view of department In supercession of the earlier circulars, CBE&C, vide circular No. 999.03/23.8.07 dated 238-2007 has clarified that a sub-contractor is also a taxable service provider. His services are taxable even if these are used by main provider for completion of his work. The subcontractor is liable even if the service is input service of the main contractor. Ref Code 079.01/23.8.07 of CBE&C Circular No. 96/7/2007-ST dated 23-8-2007 states as follows - In a case where the builder, promoter, developer or any such person builds a

residential complex, having more than 12 residential units, by engaging a contractor for construction of the said residential complex, the contractor in his capacity as a taxable service provider (to the builder / promoter / developer / any such person) shall be liable to pay service tax on the gross amount charged for the construction services under construction of complex service [section 65(105)(zzzh)]. The aforesaid view has been reiterated in CBE&C circular No. 108/02/2009-ST dated 29-12009. 1.3 Recent clarification issued by CBE&C Recently, CBE&C, vide its circular No. 138/7/2011-ST dated 6-5-2011, has clarified that a sub-contractor is liable even if main contractor is exempt from service tax, if the service provide by sub-contractor falls in a category where the service is not exempt from service tax. It seems from the circular that Jaiprakash Associates Limited, Noida had filed a writ petition and Hon. High Court had asked department to clarify their views on the issue (exact details of High Court order are not clear). Issue raised- The issue raised by Jaiprakash Associates Limited, Noida was as follows - The Works Contract Service (WCS) in respect of construction of Dams, Tunnels, Road, Bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architects Service, Consulting Engineers Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by assessee was that the benefit of such exemption to main works contractor should be extended to the sub -contractors providing various services to the WCS provider, as the service provided by the subcontractors are in relation to the exempted works contract service and hence they deserve classification under WCS itself. Departments view Department expressed following view The services received by the WCS provider from its sub-contractors are distinctly classifiable under the respective subclauses of section 65(105) of the Finance Act by their description. When a descriptive subclause is available for classification, the service cannot be classified under another subclause which is generic in nature. As such, the services that are being provided by the subcontractors of WCS providers are classifiable under the respective heads and not under WCS. Departments view is technically correct - Technically, what this circular says is correct. Architects service cannot be classified as Works Contract Service simply because that service is in relation to a works contract [If the assessees vies is accepted, telecommunication, rent-a-cab and goods transport agency service provided to works contractor would have to be classified as a Works Contract Service]. No clarification about situation where sub-contractor providing construction service itself The aforesaid circular does not talk about a situation where the sub-contractor provides construction service itself. However, it is possible that at lower level, over zealous officers may take a stand (by misinterpreting the circular), that sub-contractor is liable to service tax even in cases where he provides construction service. This will indeed open a Pandoras box.

3.16. 2.Sub-contractor providing construction service to or through main contractor

Section 65(25b) of Finance Act, 1994, defines commercial or industrial construction as follows Commercial or industrial construction means (a) construction of a new building or a civil structure or a part thereof; or (b) construction of pipeline or conduit; or (c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, 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,

which is (i) used, or to be used, primarily for; or (ii) occupied, or to be occupied, primarily with; or (iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Non-commercial work does not become commercial simply because done by sub contractor - Let us assume that a contractor has been awarded a contract for construction of road or bridge. Now, he gives sub-contract to a sub-contractor for construction of road or bridge (party or fully). The work done by sub-contractor still continues to be road or bridge construction service and hence should be outside the service tax net. Similarly construction of Government or educational building continues to be construction of Government or educational building whether done by contractor or sub-contractor. In fact, para 4 of the CBE&C circular No. 138/7/2011-ST dated 6-5-2011 specifically states that service provided by the sub-contractors/consultants and other service providers are classifiable as per section 65A of the Finance Act under respective clause of sub-clause (105) of section 65 of Finance Act, 1994. If the construction is not commercial or is relating to road, bridges etc., or is for personal residential use of customer, the main person (builder or developer or main contractor) is not liable. The definition of construction service refers to type of construction and not to type of contract. The exemption/exclusion depends upon type of construction. Thus, even if the work is done by contractor/sub-contractor, the nature of construction does not change and hence it would not be subjected to service tax. Service tax liability depends on nature of construction Some times, an argument is raised that relation between sub-contractor is on commercial basis and hence service provided by sub-contractor to main contractor is commercial even if the work of contractor is not commercial. This argument is fallacious since the taxability depends on nature of civil construction. The nature of construction does not change simply because the work is done by sub-contractor. This can also be justified by rule of purposive construction as discussed later in this Article. Better to make disclosure No doubt, department may not accept this view and you may have to enter into litigation. Hence, if you intend to take aforesaid view as explained by me, it is advisable to make full disclosure to department in advance to avoid charge of suppression of facts. 2.1 Finishing, renovation or repair services provided by sub-contractor The aforesaid principle equally applies to finishing, repair, alteration or renovation services provided by sub-contractor also, since these services also fall within the definition of service. 2.2 Works contract service Relevant extract from definition of works contract service [section 65(105)(zzzza) of Finance Act, 1994] are as follows (a) - - (b) - - (b) 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; or (c) construction of a new residential complex or a part thereof; or (d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

Thus, the principle discussed above would apply in case of works contract service provided by sub-contractor, since the definition of works contract service relates to nature of construction. This can also be justified by rule of purposive construction as discussed later in this Article. 2. Liability of sub contractor when the main contractor is liable to service tax It is now well settled that if the sub-contractor is liable to pay service tax even if service tax is paid by main contractor. In such case, the main contractor should not pay service tax under 33% abatement scheme. The reason is that if he pays service tax under 33% scheme, he cannot avail Cenvat credit of service tax paid by sub-contractor. He should pay service tax under 4.12% scheme (if he is paying works contract tax). Alternatively, he can calculate value of service and pay service tax on the value of service. In such case, he can avail the Cenvat credit of service tax paid by the sub-contractor. 3.1 Liability of sub-contractor when main contractor is liable In my view, when main person (builder/developer) is liable to service tax, the liability of sub-contractor can be summarised as follows Post construction services - Post construction services of completion and finishing are taxable w.e.f. 16-6-2005. Services of repair, alteration, renovation or restoration services in relation to building, civil structure, pipeline or conduit of work related to commerce or industry is also taxable. Similarly, in respect of construction of residential complex, finishing services are covered under clause (b) of definition as per section 65(30a). Services of repair, alteration, renovation or restoration services in relation to residential complex are also taxable w.e.f. 16-6-2005. Sub-contractors providing these services (to main contractor or to any other person) will be liable to service tax, as services are taxable if provided to any person. Construction of part of building - In other cases, the service should be construction of new building or civil structure or a part thereof. Thus, if a sub-contractor undertakes work to complete the building or part of building, his services will be taxable. A part should be functional and identifiable as a separate unit itself (e.g. spare part). One flat out of the complex or one gala or shop of commercial building is a part as it is complete in itself. Pre-completion work - If a sub-contractor does some pre-completion work like foundation of building, construction of structure, brick laying etc, it cannot be said that he is undertaking work to complete part of building and his services should not be taxable under construction service. However, the service may get covered under Business Support Service at least w.e.f. 1-5-2011, since now this service also covers operational or administrative assistance in any manner. 3.17.

4.Services provided in SEZ by sub-contractor to main contractor may be taxable

Issue relating to construction service provided sub-contractor in SEZ is more complicated. Exemption Notification No. 17/2011-ST dated 1-3-2011 (relating to SEZ) reads as follows In exercise of the powers -, the Central Government, - - , hereby exempts the taxable services specified in clause (105) of section 65 of the Finance Act, chargeable to tax under section 66 or section 66A of the Finance Act, received by a Unit located in a Special Economic Zone (hereinafter referred to as SEZ) or Developer of SEZ for the authorised operations, from the whole of the service tax, education cess and secondary and higher education cess leviable thereon. The earlier exemption Notification No. 9/2009-ST dated 3-3-2009 relating to SEZ also used the same words i.e. received by a developer or units of a Special Economic Zone.

It is learnt that Department is taking a view that the services of sub-contractor are received by contractor and not by the developer or SEZ Unit. Hence, the exemption as given in the notification is not available. 4.1Provisions of SEZ Act and Rules Section 26(1)(e) of SEZ Act states that developer and the entrepreneur shall be entitled to exemption from service tax under Chapter V of Finance Act on taxable services provided to a developer or Unit to carry on the authorised operations in the SEZ. As per second proviso to rule 10 of SEZ Rules amended w.e.f. 3-2-2009, the exemptions, drawbacks and concessions on goods and services allowed to developer or co-developer will also be available to contractor or sub-contractor appointed by such developer or codeveloper. All documents shall bear name of developer or co-developer along with contractor or sub-contractor and shall be filed jointly. Thus, services provided to contractors for ultimate use of developer should also be exempt. However, this proviso applies only in respect of SEZ Developer and co-developer and not in respect of SEZ units manufacturing or providing services. Note that SEZ Act and Rules have over-riding effect. As per section 51 of SEZ Act, provisions of SEZ Act will apply notwithstanding anything inconsistent contained in any other law or instrument having force of law. Moreover, SEZ Act is a special Act and other Acts like Customs Act, Central Excise Act etc. are general Acts. Thus, SEZ Act provisions have overriding effect. 4.2 Meaning of received by SEZ Unit or SEZ Developer The SEZ Exemption notification uses the term received by SEZ Unit or SEZ Developer. The notification does not use the words directly received by SEZ Unit or SEZ Developer. Thus, even if the service is provided by sub-contractor, ultimately it is received by SEZ Unit or SEZ Developer. 4.3 Only one deemed sale and one taxable event even when work is done by sub contractor In Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 148 STC 616 (AP HC DB), L&T were main contractors. L&T had given various work to others on sub-contract basis. Contractee (Principal) had no agreement with sub-contractors and there was no legal relationship between contractee (Principal) and sub-contractors. Department contended that there are two sales i.e. one by sub-contractor to main contractor and other by main contractor to contractee. However, High Court observed that property in goods passes through accretion. Sub-contractor acts only as agent of Contractor. Hence, there is only one taxable event. Property in goods directly passes on from sub-contractor to the contractee. Hence, there is only one sale. Thus, sales tax can be collected either from contractor or subcontractor and not both. view confirmed in State of Andhra Pradesh v. Larsen & Toubro (2008) 16 STT 501 = 17 VST 1 (SC), where it was held that main contractor is not liable to Vat on turnover of sub-contractor. There is only one deemed sale and not two, even if subcontractor had no privity of contract with the contractee. The property in goods passes to owner/contractee on its incorporation in the works contract [Main contractor i.e. L&T had not taken input tax credit of tax invoice of sub-contractor]. 4.4 Applicability of the aforesaid decision to service tax Though aforesaid decision is relation to Vat, it can be argued that the sub-contractors act only as agents of contractor to pass on the service tax to the SEZ Unit or SEZ Developer. This can also be justified on the basis of rule of purposive construction discussed below.

3.18. 5.Rule of Purposive Construction

The rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 1999) has evolved this rule of construction. Lord Denning had observed It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with approval in K P Varghese v. ITO - (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1) SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) * DLF Universal Ltd. v. Appropriate Authority 243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) same view in Amrendra Pratap Singh v. Tej Bahadur Prajapati 2004 AIR SCW 4103 * In N Kannadasan v. Ajoy Khose (2009) 7 SCC 1. In Standard Chartered Bank v. Directorate of Enforcement (2005) 4 SCC 530 = 145 Taxman 154 = 275 ITR 81 = 125 Comp Cas 513 = 60 SCL 217 = AIR 2005 SC 2622 (SC 5 member bench majority decision), it was observed, The distinction between a strict construction and a more free one has disappeared in modern times and now mostly the question is what is true construction of statute? - - Statutes are to be construed with reference to the true meaning and real intention of the Legislature. If there exists some ambiguity in the language or the same is capable of two interpretations, it is trite that the interpretation which serves the object and purpose of the Act must be given effect to. In such a case, the doctrine of purposive construction should be adopted Nathi Devi v. Radha Devi Gupta AIR 2005 SC 648 = (2005) 2 SCC 271 (SC 5 member bench). When an expression is capable of more than one meaning, the Court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the consequences of alternative constructions - Prakash Kumar v. State of Gujarat AIR 2005 SC 1075 (SC 5 member bench) same view in South Eastern Coalfields v. CCE 2006 (200) ELT 357 (SC). 5.1 Applicability of the rule of purposive construction The rule is applicable both in case of construction services relating to road, bridges, tunnels, or non-commercial construction where when contractor is not liable. The principle would also apply to services provided by sub-contractor in SEZ. 6.Conclusion Based on aforesaid decisions, the conclusions are as follows If the main contractor providing construction service which is not subject to service tax (as construction is non commercial or is relating to roads, bridges etc.) the sub-contractor providing construction service itself would not be liable but other service providers would be liable. If main contractor is providing construction service within SEZ, sub-contractor can claim exemption on the basis that (a) service is eventually received by SEZ Unit or Developer (b) SEZ Rules have overriding effect (c) Rule of purposive construction. If the construction service is a taxable service, sub-contractor is liable to service tax even if service tax has been paid on entire contract value by main contractor. If contract is given on sub-contract basis, and the service is taxable, it is not advisable for main contractor to pay service tax under 33% abatement scheme, as he cannot avail any Cenvat credit. It is advisable to make disclosure to department to avoid charge of suppression of facts and wilful mis-statement.