No libility under RCM for Work Contract Service as the service is a composite Service

[Sudhir Kumar]

A client has provided Work Contract Service by way of construction of Road and construction of buildings for Government or Government Authority. They have made expenses towards Repair & Mentainance, Labour Wages, Carriage of Magteriala and  Other Expenses. The department has issued an SCN and raised the demand under Reverse Charge on such above expenses made and reflected in Profit/Loss account. The client in his defense reply submitted that as the Work Contract Service is a composite Service so to execute such services the expenditure made towards the above items are essential and could not be treated as separate expenditure. Hence, no demand under Reverse Charge is applicable as all the expenses has been made to execute the work contract by way of either Road Construction or Construction of Building for Government Authority. 

The Department rebuted the clients defence and confirm the demand passing the Adjudication Order.

Please guide whether the client should prefer an appeal or the department has taken right action.

[KASTURI SETHI]

Since it is a  Service Tax case, there are judgements available in favour of the assessee. The following information is required :-

Does your client qualify the definition of Works Contract service as it existed in Service Tax law ?

Was service supplied with material or without material  ?

Pl. go through the terms and conditions of the Tender/Contract and post the information.

 

 

[KASTURI SETHI]

Before 1.7.17, splitting of works contract was possible. It could be treated as divisible contract. Study deep and study wide the following judgements :-

(i)  Supreme Court judgement in the case of Larsen and Toubro Vs. State of Karnataka reported 2013 (9) TMI 853 - SUPREME COURT (3-member bench)

(ii)  CCE Vs. BSBK Pvt. Ltd 2010 (5) TMI 46 - CESTAT, NEW DELHI - LB

(iii)  National Organics Chemical Industries Ltd. VS. State of Maharashtra 2012 (8) TMI 407 - BOMBAY HIGH COURT

[Sudhir Kumar]

Yes Sir the client qualify the definition of Works Contract Service. Further the service was supplied with material for construction of Building and Road.

[Kanakkupillai]

The client should prefer an appeal.

Expenses such as repair and maintenance, labour wages, and material carriage are inherent to executing the composite works contract service. Suppose the main contract (road/building construction for the government) is exempt or taxed at a specific rate. In that case, supporting expenses incurred in execution should not be treated separately under the Reverse Charge Mechanism (RCM). The department’s action appears to misinterpret the composite nature of the service, so appealing the adjudication order is a valid and advisable step.

[Shilpi Jain]

Construction is the outward supply and the expenses incurred are the inward supplies.

You cannot consider the inward and outward as composite supply.

Analyse the expenses incurred specifically to chk if there is a RCM applicability.

[KASTURI SETHI]

Dear Querist,

What is the constitutional status of service provider ?

What is the ACTUAL constitutional status of Service Recipient  ?

Are you sure that recipient is Govt. or Govt. Authority ? Can you name Govt. department ?

Definition of "Government" was changed. Check with the relevant period of demand.

[Sudhir Kumar]

Sir,

Service provider is body corporate.

Service Recipient is Government i.e RWD, Bihar and Minor Irrigation Division, Gaya Bihar

[KASTURI SETHI]

Dear Querist,

Service provider is body corporate.

Ans. If service provider is a body corporate then RCM is not applicable. FCM is applicable only if service provided to Govt. is no NOT exempted.

Service Recipient is Government i.e RWD, Bihar and Minor Irrigation Division, Gaya Bihar.

Ans. Examine the aspect of admissibility of exemption from service tax under Notification 25/12-ST(serial no.12 and 12 A). Exemption was withdrawn w.e.f. 1.4.15 and again restored retrospectively. See Section 102 inserted in Finance Act, 1994 vide section 159 of the Finance Act, 2016. Recovery from 1.4.15 to 29.02.16 was waived.

What is the period of confirmed demand ?

[Sudhir Kumar]

The period for confirmed demand was 2016-17 & 2017-18(upto June 2017)

AI Summary

Expenses for Repairs and Materials in Government Works Contracts Not Separately Taxable Under RCM Section Rules A client providing work contract services for government construction projects incurred expenses on repair, labor, and material carriage, which the tax department sought to tax under the Reverse Charge Mechanism (RCM). The client argued these expenses are part of a composite service and not separately taxable. The department rejected this, issuing a demand and adjudication order. Legal opinions suggest the client qualifies as a works contract service provider and that such expenses are integral to the composite service, supporting an appeal against the demand. However, considerations include whether the service provider is a body corporate, the constitutional status of the government recipient, and applicable exemptions under service tax notifications. The demand relates to 2016-17 and early 2017-18, with some retrospective exemption applicable. Overall, the department's action appears to misapply RCM on composite service expenses, and pursuing an appeal is advisable.