Works contract vs Construction services under Service Tax

[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?

[Alkesh Jani]

Shri

some clarification is required in the query.

1. Whether land was purchased by your client.

2. Whether civil structure was in nature of industrial or commercial (to be ascertain by way of NOC or completion certificate by competent authority.)

3. Whether VAT/Sales tax returns were filed under works contract?

[ROHIT GOEL]

Dear Akhilesh JI,

Please find below point wise clarifications:

a) No the land is not owned by the client. He has only provided the service of construction after procuring material on his own account as well as some provided by the contractee.

b) I am not sure about the same.

c) Yes VAT returns have been filed and assessed as works contract services.

[KASTURI SETHI]

If VAT returns have been filed, the department will accept the sale value (taxable value) declared to the VAT department. It will be treated on actual basis.

[KASTURI SETHI]

All the legal points and all evidences should be produced before the original adjudicating authority. Additional grounds are not allowed in appeal. Pure question of law can be raised at any time but not question of fact. Question of jurisdiction can be raised at any time.

[Alkesh Jani]

Shri

I am of the view that, As you have filed VAT returns as works contract, department have classified the same, moreover, land is not purchased by you therefore, It cannot be classified as construction service.

Query wise reply is as under

As the said transfer of property in goods, is for “works contract” service and not construction service and abetment/exemption claimed by you is not correct.

When there is revenue loss and as it is alleged that you have wrongly availed the abetment/exemption, by considering it as construction service, this is suppression of fact, extended period can be invoked. (Refer 2013 (2) ECS (204) (Tri - Mum)) = 2013 (7) TMI 235 - CESTAT MUMBAI

No. when VAT returns are available, and valuation can be determined as per Rule 2A(i). Rule 2(c)(A) can be followed only when we are not able to determine the value as per Rule 2A(i) of Service Tax (Determination of Value)Rules, 2006.

I understand that above views are not in your favour, but, as per the query raised, this is factual, in my point of view.

AI Summary

Works contract classification alters service tax valuation and permits extended limitation when construction abatement is wrongly claimed. Classification as a works contract or a construction service determines entitlement to the 67% abatement and the method for service tax valuation; valuation may be by a presumptive percentage or by deducting the VAT-assessed value of goods, and the existence of VAT returns assessed as works contract supports using VAT figures. The department invoked the extended period of limitation alleging suppression of facts where the assessee claimed construction abatement but, in the department's view, provided works contract services; factual proofs such as land ownership, nature of structure, and VAT assessments are material.