Bharat RaichandaniAdvocate

Pune, 07.11.2015

ARTICLE 246:

Subject-matter of laws made by the Parliament & State LegislatureVII Schedule

List I: Union List- sets out the areas on which only the parliament is competent to make laws

List II: State List- sets out the areas on which only the state legislature can make laws, and

List III: Concurrent List- lists out the areas on which both the Parliament and the State Legislature can make laws upon concurrently.

SERVICE TAX

Entry 92C of List I [Amendment passed by the Parliament on 15.01.2004 , but not made effective yet]

RESIDUARY ENTRIES

Entry 97 of List I Any other matter not included in List II and List III of the VII

Schedule

List I: Duties/ Taxes levied by the Union

EXCISE DUTY Entry 51 of List II

Excise duty on alcoholic liquors, opium and narcotics.

SALES TAX Entry 54 of List II

Tax on sale or purchase of goods other than newspapers, Restrictions: subject to the provisions of Entry 92A.

ENTRY TAX Entry 52 of List II

Tax on entry of goods into a local area for consumption, use or sale therein.

ARTICLE 265:

Taxes not to be imposed save by authority of law

No tax shall be levied or collected except by authority of law.

“Taxation”

Defined in Article 366 (28) as:“taxation” includes the imposition of tax or impost, whether

general or local or special, and “tax” shall be construed accordingly.

Difference between tax and fee

State of Madras v. Gannon Dunkerley (1958) 9 STC 353 (SC)Building contracts

A. V. Meiyappan v. CCT (1967) 20 STC 115 (Mad. HC.)Lease

Associated Hotels of India (A.I.R. 1972 S.C. 1131) Sale of food and drinks

Northern India Caterers (India) v. Lt. Governer of Delhi (1980) 2 SCC 167Service in restaurants

(29A) tax on the sale or purchase of goods includes : (a) a tax on the transfer, otherwise than in pursuance of a

contact, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract;

(c) a tax on the delivery of goods on hire purchase or any system of payment by instalments;

(d) tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

Sales Tax and Service Tax are mutually exclusive

Gujarat Ambuja Cements 2005 (274) ITR 194 (SC) BSNL (2006) 145 STC 91 (SC) Imagic Creative (2008) 12 STR 392

Renting of Immovable Property Service Home Solutions Retail India Limited 2011 (24) STR

129 (Del)

Financial Leasing transactions Association of Leasing & Financial Service

Companies 2010 (20) STR 417 (SC)

Construction and sale of flats MCHI 2012 (25) STR 305 (Bom)

Construction Service was introduced with effect from 10.09.2004

Rechristened as Commercial or industrial construction service with effect from 16.06.2005

Works Contract service introduced with effect from 01.06.2007

CBEC vide its letter No B1/16/2007 TRU, dated 22/05/2007 clarified that contracts which are treated as Works Contract for the purpose of levy of VAT / Sales tax shall also be treated as Works Contract for the purpose of levy of Service tax.

UBR Legal Advocates

Works Contract service - insertion of new service? or already subjected to service tax prior to 01.06.2007?

Larsen & Toubro Limited (SC)

Rule 2A was inserted in the Service tax (Determination of Value) Rules 2006 allowing exclusion of value of goods and VAT as per VAT or Sales Tax Returns

As an alternative to the above, Works Contract (Composition scheme for payment of Service Tax) Rules, 2007 were introduced.

The Composition tax is to be paid on the entire contract value by the Service Provider (Previously2%, now 4%, + Ed.Cess)

UBR Legal Advocates

Explanation inserted in commercial or industrial service and construction of complex service but the same was not inserted in work contact service.

Explanation inserted –for the purpose 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 a 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 under any law for the time being in force) shall be deemed to be service provider by the builder to the buyer - with effect from 01.07.2010?

Is Explanation constitutionally valid? Maharashtra Chamber of Housing Industry V/s UOI – 2012 (25) STR 305 (Bom)

Is the Explanation retrospective?

UBR Legal Advocates

Section 65B(44) defines ‘Service’ as:any activity carried out by a person for another for consideration

And includes Declared Services

Not to include:• Mere Transfer of title in:

• Goods or Immovable property By way of sale/gift or in any other manner

•"such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution.”

Any agreement entered into by the Builder/Promoter

before the completion of construction tantamounts to

works contracts and hence, liable to Value Added Tax

(VAT)/Sales Tax

K Raheja Development Corporation 2005 (5) SCC 162

Summary of the observations contained in Para 101 of the judgment:

(i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form.

(ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.

(iii)Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term “works contract” in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term “works contract”.

(iv)Building contracts are species of the works contract.

(v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.

(vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative.

(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.

(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract.

(ix) The expression “tax on the sale or purchase of goods” in Entry 54 in List II of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract.

(x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of ‘sale’ defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act.

(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods.

With effect from July 1, 2012

Works Contract Service

Rule 2A substituted

Value of service = Gross amount charged less actual value of goods transferred in execution

Actual value of goods for VAT purposes to be considered for determining material value

Where value is not determined then: Service value shall be computed as :

Original work – 40% of total amount charged Contract for maintenance or repair, renovation or

restoration of any goods – 70% Other works – 70%

Original works means: All new constructions All types of additions and alterations to abandoned or

damaged structures on land that are required to make them workable

Erection, commissioning or installation of plant, machinery or equipment or structures

‘Total amount’ means: Gross amount charged

Plus FMV of all goods and services supplied in or in

relation to the contract whether or not supplied under the same contract

LessThe amount charged for such goods and services,

and Less

VAT or sales tax levied thereon Specific bar inserted for availing excise duty credit in respect of inputs

used in works contract services

Whether service provider to charge full rate of tax?

Payment of entire tax by service provider: - Service recipient absolved?

Different options be exercised by provider and receiver?

Land Value?

Construction pre July, 2010 – Sale After 2010?

Electricity charges?

Reimbursements?

Security deposits – maintenance or repair

service - Pre formation of society?

Input service credit- taxable as well as non

taxable supplies?

Stamp Duty?

Redevelopment rights?

Option contracts?

99 year lease?

What is Real Estate ?

• Immovable property- Land- Sale of Flats/Dwellings/Bungalows/Buildings /premises/ tenements

• Other Contracts incidental or ancillary to above ;- Under Construction Contracts by Builders and Developers- Civil Contracts- Construction Contracts- Other Contracts

Are all contracts “Works Contracts” ??

[2005] 140 STC 22, the Supreme Court held that contract was for sale of goods as opposed to a works contract – claim of deduction on account of labour was rejected:

-The execution of the contract had two major components – the work of preparation of the site and the supply of the lift

-Skill and labour involved in converting the main components into end product was merely incidental

Overruled by Full Bench – by 4:1 majority – held works contract

Affirms Andhra Pradesh High Court judgment

Sub-contractor – Supply of main contractor or customer?

UK

Canada

Australia

New Zealand

Singapore

Malaysia

• 122nd Amendment Bill introduced in LS on 19.12.2014• Key Features

o Concurrent jurisdiction for levy of GST by the Centre and the States –proposed Article 246Ao Authority for Centre to levy & collection of IGST on supplies in the course of inter-State trade or commerce including imports – proposed Article 269A o Authority for Centre to levy non-vatable Additional Tax – to be retained by originating Stateo GST defined as any tax on supply of goods or services or both other than on alcohol for human consumption – proposed Article 366(12A)

o Goods includes all materials, commodities & articles – Article 366 (12)o Services means anything other than goods – proposed Article 366 (26A)o Goods and Services Tax Council (GSTC) - proposed Article 279A

To be constituted by the President within 60 days from the coming into force of the Constitutional Amendments Consists of Union FM & Union MOS (Rev) Consists of all State Ministers of Finance Quorum is 50% of total members Decisions by majority of 75% of weighted votes of members present & voting 1/3rd weighted votes for Centre & 2/3rd for all States together

Notwithstanding anything contained in Article 246 and 254 – “non obstante clause”◦ No corresponding entry in any of the lists in the Seventh Schedule ?◦ GST – not included in the Concurrent List ?◦ “Trade and commerce” – Meaning ? Does not use the term “economic activity”

GST on inter-state trade or commerce◦ Place of supply Rules ◦ “and” when a supply of goods or services takes place in the course of inter-state trade or commerce ?

“goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption ◦ “the” appears twice – poor grammar◦ “any” tax – meaning ? “a” tax or “the” tax ?◦ “supply” not defined ?◦ Is self supply taxable ? Is it restricted to commercial transactions only?◦ Does it include “sale” ? Or concept of “sale” has become irrelevant ?◦ Would it include “transfer of property” – would we go back to the pre 46th Amendment Era ?

“Services” means anything other than goods◦ “services” – why not “service” ?◦ Works contracts ? ◦ Licensing of intangibles ?◦ Software ?◦ Is Article 366 (29A) relevant ? Should it be omitted?

Is the dispute between “goods” V/s “service” over?◦ Threshold exemptions ?◦ Category based exemptions?

Bharat RaichandaniAdvocatePartnerUBR LegalAdvocates

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