28 August 2008
One of our client is providing AMC for Telecome Equipements. I would like to know the provisions of WCT and Service Tax pertaining to such activity. Please Note that AMC billing is being done in Advance and the amount of material that may be required to be used for the AMC is neither ascertainable nor any benchmark exists for the same.
15 September 2008
Works contract tax is leviable on indivisible works contract of labour and supply. In your case transfer of property in goods is being made during executioon of works contract,and accordingly the transaction will attract VAT/WCT.
Service tax will also be applicable on the same. As regards the value of services and sales, pl. refer books.
15 September 2008
Could you please explain the rationale for bifurcation of value for VAT/WCT and Service Tax.Or you mean to say that on the whole amount both the taxes would be levied.
17 September 2008
I will prefer to submit here a copy of my reply given to a coroporate client:-
VALUATION OF TAXABLE TURNOVER IN INTRA-STATE WC Constitution of India, vide its Article 286, clause 3(b) has empowered the Central Government to frame restrictions and conditions in regard to the system of levy, rates and other incidents of the tax in some specified nature of sales & purchases of goods. Article 286(3) reads as under:- Any law of a State shall, in so far as it imposes, or authorises the imposition of,— (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify.
Though, the Parliament has framed such restrictions in regard to sub-clause (a) above, but till now (after passing of 25 years of insertion of such clause) has not yet framed any such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax on sale or purchases of goods, being a tax on the nature referred to in sub-clause (b), (c) and (d) of the clause 29(A) of the Article 366. As we know, sub-clause (b) here denotes transactions relating to works contract.
The question raised, does the sub-clause (b) of clause (3) of article 286, debar state legislature to frame laws relating to system of levy, rates and other incidents of the tax, in regards to specified nature of transactions. Constitution bench of the Supreme Court while dealing this question in the case of Gannon Dunkerley (1993) had declared that:-
“In view of sub-clause (b) of clause (29-A) of article 366, the State Legislatures are competent to impose tax on transfer of property in goods involved in the execution of a works contract and under sub-clause (b) of clause (3) of article 286 the Parliament has been empowered to make a law specifying restrictions and conditions in regard to the system of levy, rates or incidence of such tax. This does not mean that the legislative power of the State cannot be exercised till the enactment of a law under sub-clause (b) of clause (3) of article 286 by the Parliament. It only means that in the event of a law having been made by the Parliament under article 286(3)(b) the exercise of the legislative power of the State under entry 54 in List II to impose a tax of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of article 366 would be subject to restrictions and conditions in regard to the system of levy, rates and other incidence of tax contained in the said law. The existence of a law enacted under article 286(3)(b) cannot, therefore, be regarded as a condition precedent for the exercise of the taxing power of the State under entry 54 in List II to impose a tax of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of article 366. This does not, however, absolve the Parliament from enacting a law as envisaged by article 286(3)(b). Keeping in view the grievance of the contractors that there is wide disparity in the sales tax legislation of the various States in the matter of imposition, mode of assessment, rates, etc., of the tax on deemed sales resulting from transfer of property in goods involved in the execution of a works contract referred to in sub-clause (b) of clause (29-A) of article 366, the need for the law envisaged by article 286(3)(b) cannot be minimised.”
Thus, it appears that due to failure of our parliament in framing such laws, state legislatures are utilising their own discretion in making laws regarding imposing of tax on the specified nature of transactions. Certainly, this was not the intention of the Constitution (Forty sixth Amendment) Act, 1982). Accordingly, all the State Legislatures are making their own laws in relation to finding out the taxable value of property in goods transferred in the execution of works contract. In the opinion of yours truly, the guidelines of the Constitution bench of the Supreme Court provided in the case of Gannon Dunkerley (1993) are followed by State Legislatures in making such laws. The Constitution bench in the above case, had laid down following guidelines to find out the taxable value of property in goods transferred in the execution of works contract:-
(1) in exercise ……………………….. sales as well as sales outside the State and sales in the course of import or export. (2) The …………. by article 366(29-A)(b). (3) While defining the expression "sale" in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale …….. import and export. (4) The tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract falling within the ambit of article 366(29-A)(b) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of works contract would constitute the measure for imposition of the tax. (5) In order to determine the value of the goods which are involved in the execution of a works contract for the purpose of levying the tax referred to in article 366(29-A)(b), it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract. (6) The charges for labour and services which are required to be deducted from the value of the works contract would cover (1) labour charges for execution of the works, (2) amount paid to a sub-contractor for labour and services, (3) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (4) charges for planning, designing and architect's fees, and (5) cost of consumables used in the execution of the works contract, (6) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (7) other similar expenses relatable to supply of labour and services, and (8) profit earned by the contractor to the extent it is relatable to supply of labour and services. (7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the assessing authority the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so it has to be ensured that the amount deductible under such formula does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various types of works contract. (8) While fixing the rate of tax it is permissible to fix a uniform rate of tax for the various goods involved in the execution of a works contract which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article.
Now, let us look in to the provisions under the Assam Value Added Tax Act, 2003 relating to finding out the taxable value of works contract:-
Section-10: Levy of tax on sales.- (1) Every dealer, who is liable to pay tax for any year under section 7, shall pay output tax on his taxable turnover for such year,— (a) in respect of goods specified in the Second, Third and Fifth Schedule, at every point of sale of such goods within the State, at the rate or rates specified therein; and
Section-11: Taxable Turnover.- For the purpose of this Act, “taxable turnover” in relation to a dealer liable to pay tax on sale of goods means that part of the dealer’s gross turnover during the prescribed period, which remains after deducting therefrom,— (a) the turnover of sales of goods specified to be exempt from tax in the First Schedule; (b) the turnover of sales of goods which are shown to the satisfaction of the Prescribed Authority to have taken place,— (i) in the course of inter-state trade or commence; or (ii) outside the State; or (iii) in the course of import of goods into or export of the goods out of the territory of India. Explanation.— Sections 3, 4 and 5 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) shall apply for determining whether or not a particular sale or purchase has taken place in the manner indicated in sub-clause (i), sub-clause (ii) or sub-clause (iii); (c) the charges towards labour, services and other like charges, subject to such conditions as may be prescribed, in case of turnover of sales in relation to works contract, in addition to the deductions available under clause (b):
Provided that where the contractor does not maintain proper accounts or the amount actually incurred towards charges for labour and other services and profit relating to supply of labour and services are not ascertainable from the accounts maintained by him, the amount of such charges for labour and services and such profit may, for the purposes of deductions, be determined on the basis of such percentage of the value of the works contract as specified in the Sixth Schedule;
(d) the turnover of such other sales or such other amount, as may be prescribed.
Rule 10: Determination of sale price in respect of sale by transfer of property in goods involved in the execution of works contract.— For the purpose of clause (c) of section 11, the value of the goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so far as the amounts relating to the deductions pertain to the said works contract:- (a) labour charges for execution of the works; (b) amounts paid by way of price for the entire sub-contract to subcontractors; (c) charges for planning, designing and architect’s fees; (d) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel, etc. used in the execution of the works contract, the property in which is not transferred in the course of execution of the works contract; (f) cost of establishment of the contractor to the extent it is relatable to the supply of labour and services; (g) other similar expenses relatable to the supply of labour and services; and (h) profit earned by the contractor to the extent it is relatable to the supply of labour and services.
As per Schedule 5, item no. 3 rate of tax prescribed for works contract is 12.5%.
Hence, it is clear that:- a) Turnover relating to sales in the course of Inter State trade & Commerce, in the course of import and export and Out-side sales are not taxable under this act. b) The tax is imposed only on the value of transfer of property in goods during the execution of works contract. c) In arriving at the taxable value, the charges for labour and services are also out of ambit of taxation. d) Where books of accounts are not maintained properly or where such charges/ expenses could not be determined from books of account, there is a provision of lump sum deduction of charges for labour and services and such profit. It is also clear that:- a) No provision of charging tax on declared goods (as defined in section 14 of the CST Act) at the prescribed tax under section 15 of the CST Act. b) No system or procedure has been formulated to determine; i) cost of establishment of the contractor to the extent it is relatable to the supply of labour and services; ii) profit earned by the contractor to the extent it is relatable to the supply of labour and services.
The questions that arises from the above findings are:- 1) Whether denying the benefit of restrictions of section 15 of the CST Act in finding the taxable value of property in goods transferred during the execution of works contract is valid? This question was resolved by hon’ble High Court of Guwahati and accordingly restrictions of section 15 of the CST Act regarding taxation of declared goods (As per section 14 of the CST Act) will also be applicable in case of WC Tax. 2) In absence of any established/ prescribed formula, how can the cost of establishment and profit relatable to labour & services be found out? 3) Whether payment to sub-contractors are deductible in case the contractor failed to maintained the books of account? Schedule-6 is showing the maximum percentage of allowable deduction; does it mean that the assessing officer is empowered to allow any lesser percentage of deduction? 4) Is it permissible to charge uniform rate of tax on all the goods used in the execution of works contract?
Let us now try to find out the answer of 2nd question:- Q-2: In absence of any established/ prescribed formula, how can the cost of establishment and profit relatable to labour & services are found out?
As per the decision of the Supreme Court in the case Gannon Dunkerley (1993), while calculating taxable turnover of works contract, the followings should also be deducted from the Contact Value. a) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, b) profit earned by the contractor to the extent it is relatable to supply of labour and services.
Cost of Establishment:- Both the above said clauses have been as it is incorporated in rule-10 of the AVAT Rule, 2005. Before, we find the answer of the above question; let us find out what is ‘cost of establishment’? Let us know the same in the words of the judgment, wherein the expression was first used in this context. “The charges mentioned in item No. (vii) relate to the various expenses which form part of the cost of establishment of the contractor. Ordinarily the cost of establishment is included in the sale price charged by a dealer from the customer for the goods sold. Since a composite works contract involves supply of materials as well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods” “The charges mentioned in item No. (VII)” here stands for the following:- “over head expenses of the head office and branch office including rents, salary, electricity, telephone charges, etc., and interest charges to banks and financial institutions”
Thus it is clear that the cost of establishment in this context will mean the over-head expenses. Hence all the over-head expenses relatable to supply of labours & services are to be deducted from Contract value. It is to be kept in mind, that the list given above is inclusive one and other overhead expenses are not excluded from this list.
How to calculate cost of establishment relatable to supply of labour and services:- There is no specific rule in this regard has been provided, neither in the statute nor we have find any answer of this question in any judiciary judgment. A question may arise here, that what is meant here, by the expression ‘supply of labour and services’? In common parlance, there is no supply of labour or service in execution of a works contract. Works contractor are using labour in providing services. Hence, in the authors opinion, the expression ‘supply of labour and services’ should mean ‘labour and services in executing the works contract’. If we consider the saying of the Supreme Court, i.e., “The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods”, there remains no doubt in this respect. How, the expenses can be segregated in these two heads- is not easy to answer. It should be decided on case-to-case basis. The amounts so deductible would have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor
How to calculate profit earned by the contractor to the extent it is relatable to supply of labour and services:- This issue is also to be understood in the same spirit as understood in the previous issue. The court had clarified that “The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded.”
The amounts so deductible would have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. In some judgments of different high courts, the phrase “reasonable profit” has been used in this context.
Let us now try to find out the answers 3rd question:- Q-3: Whether payment to sub-contractors is deductible in a case where the contractor failed to maintain the books of account? Schedule-6 is showing the maximum percentage of allowable deduction; does it mean that the assessing officer is empowered to allow any lesser percentage of deduction?
It seems that, deductions for payment to sub-contractor are available in addition to the fixed percentage from the value of works contract, if the sub-contractor is paying taxes on such sub-contract receipt. Though, the proviso of the sub-section 11(c) is silent on this issue, the necessary empowerment is available in the sub section it self. The sub-section provides deductions on A/c. of labour, services and other like charges, whereas the proviso is allowing deductions on fixed percentage for charges of labour and services only. Hence, the proviso does not curtail the power of the dealer to deduct ‘other like charges’. At least, the amount paid to sub-contractors seems to be included in the head ‘other like charges’.
Coming to the second part of the question regarding use of the phrase “Percentage of deduction under Section 11(c) not more than” in the sixth schedule, it seems pertinent to quote last few words of the proviso. These words are “for the purposes of deductions, be determined on the basis of such percentage of the value of the works contract as specified in the Sixth Schedule”. Here the word ‘specified’ is to be understood properly. As per compact oxford reference dictionary, the word ‘specify’ means state and identify clearly and definitely. The word ‘specified’ means no more than “made clear” [Sheffield C.C. v. Graingers Wines, (1978) 2 ALL ER 70, 75 (General Rules Act, 1967, S. 17, Sch-1). It appears that the word ‘specified’ in this proviso denotes the intention of specific percentage of deduction. Had there been the intention of the legislature to give any discretion to the Assessing Officer, the same could have been mentioned in the proviso it self.
Even the decision of Supreme court in the Gannon Dunkerley (1993)’s case said “ In cases where the contractor does not maintain proper accounts or the accounts maintained by him are not found worthy of credence it would, in our view, be permissible for the State Legislature to prescribe a formula for determining the charges for labour and services by fixing a particular percentage of the value of the works contract and to allow deduction of the amount thus determined from the value of the works contract for the purpose of determining the value of the goods involved in the execution of the works contract.
Let us now try to find out the answers 4th question:- Q-4: Is it permissible to charge uniform rate of tax on all the goods used in the execution of works contract?
The Constitution bench of the Supreme Court in Gannon Dunkerley (1993)’s case had clarified that “In our opinion, therefore, it would be permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods because the goods which are involved in the execution of the works contract when incorporated in the works can be classified into a separate category for the purpose of imposing the tax and a uniform rate may be prescribed for sale of such goods.” (para-236, 237).
Accordingly, it seems that the states are authorized to charge tax at a uniform rate in a works contract, but if we read the para 235 of the same judgment, it appears that the Supreme Court had made it clear that, while calculating value of goods involved in the execution of works contract, the value of few goods are to be excluded. The Court clarified that:-: “We may, however, make it clear that apart from the deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract.” (para-235)
If we read all the above said three paras of the order, it appears that the power of State legislature in charging the tax at uniform rate is applicable only on the value of goods calculated as per the above said clarification of the Court. Accordingly, it seems that, exempted goods involved in works contract can not be taxed at the said uniform rate.
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