service tax

[Asked by Guest]

In residential complex service, if the builder has paid service tax under partial reverse charge for works contract provided by the contractors on the advice of departmental audit and the department has accepted the same then how far is the department correct in demanding proof of material purchased and the proof of VAT paid by the contractor while discharging the remaining 50% of tax liability by the contractors under reverse charge.

The fact of the matter is that the builder was paying tax on residential complex service and it is in the common knowledge of every one including the department that the builders engage contractors for supply of materials as well as service but till the time of this audit neither the department nor the earlier audit ever pointed out the builder or the contractor regarding their liability of paying service tax. Hence, they were unaware of any additional payment of service tax other than the tax they were paying on the residential complex service.

Since the contractors were not aware of the service tax rules, they simply purchased building materials from the market and with the help of manpower completed the required job of construction of residential complex of the builder without maintaining any records thereof, more so, because their payment was based on the measurement basis which did not require them to maintain records.There was no formal work orders. every thing was verbal. Therefore, no ill intention on the part of contractor can be attributed in the present case for not keeping any record of material purchased. Moreover, as at every stage credit was available to the contractor as well as to the builder, in ultimate analysis, the government exchequer was also not in loss.

There is no dispute regarding construction of residential complex and therefore, the use of building material and its vat able nature also cannot be disputed which is in line with the definition of Works contract.

The department's contention is that if the contractors do not produce the purchase documents and proof of payment of VAT then they will have to pay tax on the full value.

How far is department's contention of not agreeing to grant works contract status of the construction work done by the contractor correct in view of the fact that the builder has already paid 50% duty under reverse charge on the same service i.e works contract on the basis of departmental audit? Can tax be charged under reverse charge at the end of builder and at full rate at the end of contractor for the same service? If not, what would be the way out?

AI Summary

Reverse charge liability may require contractors to substantiate material purchases or face valuation-based tax adjustments.
The dispute concerns whether contractors must produce purchase invoices and VAT proof after a builder paid part of service tax under the reverse charge for works contract services. Valuation rules treat material value as part of consideration; if material and service are not bifurcated on contractor invoices, the department may apply valuation rules to the gross amount. The department seeks purchase and VAT evidence to include material value in taxable service; absence of documentation may lead to differential tax based on valuation methodology rather than arbitrary full-rate double charging.