Regarding Work Contract under reverse charge mechanism.

[Asked by Guest]

Dear Sir,

1) If we purchase a machinery parts and this price is including the installation charges also. and the material provider person comes our factory and install this parts in our machine.

In the above case service tax will attract under reverse charge mechanism or not for service recipient ?

2) some service provider repairs our split AC in our office and with material in that case service tax will attract or not ?

Can any one explain me the regarding Work Contact under reverse charge mechanism with example in which type of service falls under work contract and liable to pay service tax as a service recipient

Regards

Swapneswar Muduli

[Ganeshan Kalyani]

1) The price is inclusive of installation charges which means the contract is for both material and labour and hence it satisfies the conditions of works contract and works contract is classified under reverse charge Notification and as such service tax is liable to be paid partially by service provider and service recipient in the proportion specified in the reverse charge notification.

2) Repair would include both material and labour component and therefore service is applicable under reverse charge.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

With due honour, I totally differ on this issue. I know this is an hypothetical query and even then it is very interesting and informative query. Point-wise reply to query is as under:-

1. This falls under the erstwhile category of "Management, Maintenance or Repair Services" specified under erstwhile Section 65 (105)(zzg) of the Finance Act, 1994. This is maintenance. This service is neither eligible for abatement nor Reverse Charge Mechanism. This service cannot be treated as service with material inasmuch as value of the part to be fitted in the machine and labour charges (fitting charges) are known to the Service Provider (and dealer). Both can be bifurcated easily i.e. Sale and service. Service Tax cannot be charged on sale of any part of the machine. Here deduction is allowed in terms of erstwhile Notification No.12/2003-ST dated 20.6.2003 (Now rescinded).Though Notification stands rescinded but value of the machine is excluded, it being sale. In other words, it is a case of 'pure labour' and hence cannot be classified under the category of "Works Contract Service".Hence not eligible for abatement and RCM.

2. This is repair service and also falls under erstwhile category of "Management, Maintenance or Repair Services" specified under erstwhile Section 65 (105)(zzg) of the Finance Act, 1994. Remaining reply is same as at point no.1.

Maintenance is continuance activity and repair is one time activity. At present both activities are covered under the category of ,"Other Than Negative List". Service Receiver will pay ST to the Service Provider and SP would deposit into the Govt. account.

If any assessee classifies both type of services in "Works Contract Service" on the basis of service being provided with material, it will be misclassification and misuse of the benefits provided under abatement and RCM schemes.

 

 

[Ganeshan Kalyani]

Thanks for your reply. But with due respect I would like to share that in the definition of 'works contract service' the term 'installation' and 'repairs' are defined. Also it satisfies to a contract which involves supply of material and service portion in the form of installation, erectioning and commissioning. It is evident that machine is purchased and it need to be installed to make it function. The question will emerge to clarify that the price of machine is added to include the service value of installation. In the regime of reverse charge mechanism the auditor raises these questions apparently and asks for service tax on the pretext that the contract consists both material and labour portion and it satisfies the conditions of works contract service. Further regarding second query I.e. repair which is also given in the definition. However I would like to go by your views if you could support your reply with a case law. Thanks.

[KASTURI SETHI]

Sir,

I shall reply today.

[KASTURI SETHI]

Replied under Issue ID No. 109851.

[Ganeshan Kalyani]

Thanks Sri Kasturi Sir.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Pl. let me know are your fully convinced or not. It is in my interest to know your views as there is always scope for improvement.

AI Summary

Reverse charge liability hinges on whether a parts-plus-installation supply is a works contract or a maintenance service.
Whether an inclusive contract for supply of parts with onsite fitting is a works contract subject to reverse charge depends on classification: one approach treats the composite supply (material plus installation) as works contract attracting reverse charge with split liability; the contrasting approach treats parts as sale and the fitting as maintenance/repair service, with the service provider liable to charge and remit service tax.