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.

AI Summary

Composite works contract: ancillary execution expenses should not be separately taxed under reverse charge when integral to the service.
Whether expenses incurred by a contractor in executing a composite works contract for government-such as repair and maintenance, labour wages, carriage of materials and other overheads-are subject to tax under the Reverse Charge Mechanism depends on characterisation of the transaction as a composite Works Contract service, the contract terms and supplied materials, the constitutional status of the recipient and provider, and the applicability of exemption notifications and retrospective statutory relief for the demand period.