Works contract vs Construction services

[ROHIT GOEL]

Dear Sirs,

X & Co. executed a contract for construction of building involving transfer of property in goods. However, while filing their service tax return for FY 2010-11 and FY 2011-12, they filed return under service category of 'industrial and commercial construction' and availed 67% abatement and paid tax on the balance.

Thereafter, case was opened for adjudication by invoking extended period of limitation within 5 years on the grounds that assessee had concealed material facts which only came to light upon departmental audit. The AO held that the assessee's services were actually of the nature of works contract and he was not eligible for abatement of 67%. Instead, value of service was determined by Valuation rules which restrict value of service in a works contract at 40% of the contract value.

My question is:

a) When there was transfer of property in goods involved, are the actions of the AO correct in light of law prevailing during FY 2010-11 and FY 2011-12?

b) Whether extended period of limitation could be invoked here as facts regarding payment of tax under construction category instead of works contract were present on record in the service tax returns and as such there was no suprresion of facts as alleged?

c) Since Valuation rules prescribe 2 options of either 40% taxable value or Service value=consideration-Value of goods as per VAT, was the assessee entitled to plead that the second option be applied as it is more beneficial to assessee?

[KASTURI SETHI]

Query-wise reply :

1. Yes. The department's stand is correct as per ST law existed during the year 2010-11 and 2011-12. The ratio of 60% : 40% is applicable only in case the party cannot ascertain the value of property in goods transferred, on actual basis. Actually the property in goods transferred is deemed sale and the remaining portion is service. If the party has paid VAT/Sale Tax on the property in goods transferred by way of sale (deemed sale), that value can be the basis for claiming abatement from the gross amount of instead of 60 %.

2. Extended period cannot be invoked as the demand was raised on the basis of audit objection. You are right that all facts were present in the statutory records of the party. There are case laws (including judgement of High Court) wherein it has been held that extended period cannot be invoked if the demand is raised on the basis of audit objections. case laws are easily traceable.

3. Yes. It is the party's right. Discussed in detail in serial no.1 above. The party should be able to give segregate gross amount into Sale and Service.

[KASTURI SETHI]

Pl. read "to segregate" instead of "give segregate".

[DR.MARIAPPAN GOVINDARAJAN]

I endorse the views of Shri Sethi.

[KASTURI SETHI]

Dr.Govindarajan Sir, Thanks a lot for your support. You always support on merits whosoever. may be. Your support boosts moral of an expert.

[KASTURI SETHI]

Read ' morale'.

AI Summary

Classification of construction services affects abatement entitlement and valuation under service tax rules for contracts involving transfer of goods. Where a construction contract transfers property in goods, that transfer is treated as a deemed sale and the remainder as service; if the value of goods is ascertainable and reflected in tax records, that value may be used to claim abatement from the gross contract consideration rather than applying a presumptive split. The extended limitation period is not appropriate where the relevant facts were disclosed on statutory records and the demand stems from an audit objection, and the taxpayer may elect the valuation option based on segregated consideration for goods and services.