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Job work vs. works contract

Shivani (Learner) (1881 Points)

17 May 2013

What is a difference between job work and works contract?

Please guide me with an example.

thanks

shivaniadream @ gmail.com

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CA Shree Jain (Chartered Accountant) (1572 Points)
Replied 17 May 2013

What is indivisible Works Contract ?
( Difference between Normal Sale & Works Contract )

The works contracts are not normal sales. In the normal sale there is a transfer of property in definite or ascertained goods. The goods remain same before and after the delivery of the goods. However, in works contracts it does not happen. The goods before the delivery and after the execution of works contracts are different, many times in different form also. For example, at the site of construction of a building, before the Construction (works contract) commences, the goods like cement, steel, sand etc. are lying but after the Construction a building (immovable goods) comes to an existence. This is the difference between the ` Normal” sale and the “deemed sale” in the indivisible works contract .

The Supreme Court of India, in its various landmark judgments has confirmed in the following wordings the difference between a normal sale (as defined under the sale of goods Act) and an indivisible / composite works contract;

“In a contract of sale, the main object is the transfer of Property and delivery of the possession of Chattel as a Chattel to the buyer, where it is not so, it is a contract of Works & Labour” (Hindustan Aeronautics Ltd. 55-STC 314-SC).

“If the thing to be delivered has any individual existence before the delivery as the property of the party who is to deliver it, then it is a sale. If the main object of the work undertaken is not the transfer of a Chattel qua Chattel, the contract is one for work and labour” (Hindustan Shipyard – 119 STC 533-SC).

“The activity is a sale or works contract depends upon the facts, the terms and conditions and the intention of the parties” (Mekenzis Ltd.-165 STC-58 SC)

In normal practice, we can identify many indivisible/composite works contracts namely construction of a Building, erection of Plant & Machinery, Processing jobs, Job works, Repair jobs, Electrical Fittings, Annual maintenance Contracts (AMCs). Installation of Elevators, Air Conditioners, Repairs of Vehicles, Re-trending of old tyres, Customized Printing Jobs, Electro Plating, electro-galvanizing, anodizing etc. We would discuss later , the levy of Sales Tax/VAT on such activities which are indivisible works contracts.

2. What is a Deemed Sale ?

Under the State Sales Tax Laws, before the 46 th Amendment to the Constitution of India, the Sales Tax was applicable only on the sales covered under the sale of goods Act (Normal sale). The indivisible works contracts were not covered under the State Sales tax Acts since works contracts were not normal sales. The Supreme Court confirmed this legal status in its land mark judgment in the case of Gammon & Dunkerely (9 STC 353). Due to this legal status, the states were denied the levy of Sales Tax on the indivisible works contracts. Such contractors were outside the clutches of sales tax laws.

The then Finance Ministers of the States have requested the then Union Finance Minister to take necessary legal steps so as to levy Sales Tax on indivisible works contracts.

Finally, the 46 th amendment to the Constitution of India has been made on 2 nd February, 1983 to add a sub-article (29-4) as under,

“(b) a tax on the transfer of property in goods (whether a goods or in some other form) involved in the execution of a works contract”.

After the said 46 th Amendment to the Constitution, the States were empowered to levy Sales Tax / Works Contract Tax on such sales, called as “Deemed sales” involved in the execution of works contract. Due to the said amendment, the concept of `Deemed Sale’ was introduced. The important features of deemed sales are as under,

(a) It is not a normal sale as defined under sale of goods Act but a deemed sale of goods subject to sales tax by the States.

(b) In the `deemed sales’ the states can levy Sales tax only on `the transfer of property in goods” . In other words , the states can levy Sales Tax / VAT only on the `Material Value’ of the works contract and not on the `labour portion’ of the works contract.

( c ) If in a contract there is no transfer of property in goods from the contractor to the contractee, then No sales tax is applicable on such contracts, called as “ Pure Labour Jobs”.

(d) Under the deemed Sale , an artificial break up of indivisible works contract has to be made to arrive at the `material’ value and the `labour’ value of the contract.

Therefore, after the 46 th Amendment to the Constitution of India, the States are empowered to levy sales tax (now VAT) on such deemed sales but only on the `Material Value’ of the works contract. The High Courts and the Supreme Court have suggested methods on “How to arrive at a material value from the total Contract Price”. (Gannon Dunkerly’s SC Judgement 1993 ) (88 STC 204).

The Supreme Court has also allowed the States to come out with an alternative method to levy Sales Tax on Works contract, if to arrive at material value is difficult. The states have come out with a alternative method called as “Composition Tax” method to tax the indivisible works contract, which is a non-legal /alternative method. The small percentage like 1%, 2%, 4%, 8% as Composition Tax is levied but on the total contract price without any deduction which is available in the legal options under the State Sales Tax / VAT Acts. After, the said amendment to the Constitution certain States a namely Maharashtra & Delhi have come out with separate `Works Contract’ Acts. The other states incorporated the separate provision to levy Sales Tax on the deemed sales in the works contracts. Under the State Sales Tax Acts or separate Works Contract Acts, No contractor or contractee were entitled to claim any set off of Sales Tax paid to their vendors. There was a double taxation in the hands of Contractors in the Sales Tax Regime.

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ramesh (CA Final) (61 Points)
Replied 17 May 2013

Work Contract is service which includes value addition in respect of materials. Job work does not incllude any value addition in respect of materials. Job work is covered under Business Auxillary Services in Service tax.

As an example, a service of a building contractor to erect a building by procuring materials and labor himself may be called a work contract service.

A work of a trimming of moulded parts and making the parts fine (No value addition in materials, but only labor), it can be considered a job work.

I think U have understood.

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SYAMKUMAR.S (Accountant) (94 Points)
Replied 21 July 2017

Ramesh sir,

For Example i am giving some door mats to a person for printing some pictures, WITH Paint,Moulds and all other accessories , he is only using his labour, in this context after his work the value of door mat will increase ( bare mats to printed mats), In this Condition In which category his work belongs ????