Applicability of WCT and Servicet Tax on our work order

[Guest]

Dear Sir,

We have a work order for fabrication and erection service for which material is issued on free of cost except the consumable like welding Electrodes, gases etc.

This material is also issued to our client on free of cost by their customer and our client is having work order with the customer which also involves some items including supply, accordingly in their work order with customer composite tax has been fixed has 4.94 percent extra.

Where as in our work order there is no supply of material, however our client says that the same VAT of 4.94 percent only will be paid instead of 12.36 percent to us, as we are not into composite scheme we are not able to understand how far it is correct. As per our client welding electrodes are considered has transfer of material and Vat is applicable, but the electrodes are used only as consumable for fabrication of free supplied material, no sales part is involved.

Kindly confirm under which clause we can defend as we have already deposited the service tax at the rate of 12.36 percent against some of our RA Bills.

Regards

Anilkumar.K

[Rajagopalan Ranganathan]

Sir,

       Under service tax regime no distinction between inputs and consumable is applicable.  Under sub-rule (ii) of rule 2A of Service Tax (Determination of Value) Rules, 2006 in respect of original works, namely, erection, commissioning or installation of plant, machinery or equipment or structure whether pre-fabricated or otherwise, under clause (A) forty percent of the total amount charged for the works contact is the value on which you have to pay service tax at the rate of 12.36 percent .  For example-

          If the gross value of works contract is Rs. 100, then you have to pay 40/100*12.36= 4.94 as service tax or you can straight away calculate you tax liability at the rate of 4.94 percent of the gross value, that is, Rs. 100/-.  Therefore you customer is right in saying that you have to pay only 4.94 as service tax instead of 12.36.

          You can file refund claim in respect of excess service tax paid on the ground that though you have paid 12.36 as service tax , you have been reimbursed by you customer only 4.94 as service tax. Hence you have not passed on the excess service tax paid to your customer had hence doctrine of unjust enrichment is not attracted in your case.  

AI Summary

Valuation of works contracts uses the prescribed portion as taxable base; consumables treated same; excess tax refundable. For fabrication and erection services treated as original works, the taxable value is determined by applying the prescribed proportion of the total amount charged as the taxable base; inputs and consumables are not separately treated. Materials supplied free by the client, including consumables used in execution, do not alter this valuation. If tax was paid on the full gross amount but reimbursement from the client reflects only the prescribed taxable portion, the contractor can claim refund of the excess tax paid because that excess was not passed on to the client.