“Subject: Representation by Jaiprakash Associates Limited, Noida, in terms of Judgement dated 14-2-2011 in W.P. No. 7705 of 2008 – regarding
1. The Works Contract Service (WCS) in respect of construction of dams, tunnels, road, bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by Jaiprakash Associates Limited seeks to extend the benefit of such exemption to the sub-contractors providing various services to the WCS provider by arguing that the service provided by the sub-contractors are “in relation to” the exempted works contract service and hence they deserve classification under WCS itself.
2. The matter has been examined.
(i) Section 65A of the Finance Act, 1994 provides for classification of taxable services, which mentions that classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clauses that provide a more general description.
(ii) In this case, the service provider is providing WCS and he in turn is receiving various services like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, Maintenance or Repair etc., which are used by him in providing output service. The services received by the WCS provider from its sub-contractors are distinctly classifiable under the respective sub-clauses of section 65(105) of the Finance Act by their description. When a descriptive sub-clause is available for classification, the service cannot be classified under another sub-clause which is generic in nature. As such, the services that are being provided by the sub-contractors of WCS providers are classifiable under the respective heads and not under WCS.” …………………..
3. “Therefore, it is clarified that the services provided by the subcontractors/consultants and other service providers are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clauses (105) of section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.”
• CBEC Circular No. 147/16/2011-ST dated 21-10-2011 “
1. Reference is invited to the Circular No.138/07/2011– Service Tax dated 06.05.2011 wherein it was clarified that the services provided by the sub-contractors/consultants and other service providers to the Works Contract Service (WCS) provider in respect of construction of dams, tunnels, road, bridges etc. are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clause (105) of section 65 of the Finance Act and are chargeable to service tax accordingly. Clarification has been requested as to whether the exemption available to the Works Contract Service providers in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., is also available to the subcontractors who provide Works Contract Service to these main contractors in relation to those very projects.
2. It is thus apparent that just because the main contractor is providing the WCS service in respect of projects involving construction of road, airports, railways, transport terminals, bridges, tunnels, dams etc. it would not automatically lead to the classification of services being provided by the sub-contractor to the contractor as WCS. Rather, the classification would have to be independently done as per the rules and the taxability would get decided accordingly.
3. However, it is also apparent that in case the services provided by the sub-contractors to the main contractor are independently classifiable under WCS, then they too will get the benefit of exemption, so long as they are in relation to the infrastructure project mentioned above. Thus it may happen that the main infrastructure projects of execution of works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams, is sub-divided into several sub-projects and each such sub-project is assigned by the main contractor to the various sub-contractors. In such cases, if the sub-contractors are providing works contract service to the main contractor for completion of the main contract, then service tax is obviously not leviable on the works contract service provided by such sub-contractor.”
- Taxability of sub-contractors under VAT – Important Judicial Principles
In the case of Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 146 STC 610 (AP), there were three parties, viz.:
Contractee – One who awarded the contract
Contractor – One who took the whole con-tract
Sub–Contractors – To whom main contractor gave the contract.
Petitioner filed a writ petition praying for a declaration that section 4(7), Explanation VI to section 2(28) of the Andhra Pradesh Value Added Tax Act, 2005, Rule 17(1)(a) and 17(1)(c), read with Rule 17(1)(e) of the Andhra Pradesh Value Added Tax Rules, 2005 are against Article 366(29A)(b) of the Constitution of India and the scheme of levy and recovery of taxes both at the hands of the nominated sub-contractors and the main contractor is beyond the legislative competence of the state legislature. The Andhra Pradesh High Court held as under:
• “Sub–contractor is an agent of the contractor – Though there are two agreements in the transaction of execution of works contract by a contractor through sub-contracts, satisfying the definition of “works contract” under the APVAT Act, it must be noticed that there is no agreement between the contractee and the sub -contractor and, consequently, there is no legal relationship creating either rights or obligations between them under an agreement. In between the contractee and the sub -contractor, the relationship is simply that the sub-contractor is an agent of the contractor.
• Property in goods passes directly from the sub-contractor to the contractee – In a works contract, the property in goods passes directly to the contractee by the theory of accretion. In the event of a contractor awarding the contract to a sub-contractor, the property in goods does not pass to the contractor at any point of time. The sub-contractor is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the contractee and, therefore, there can be only one sale recognised by the legal fiction created under Article 366(29A).”
• Taxing both contractor and sub-contractor would be double taxation – That to hold that there are two taxable events in such a transaction, enabling the State to levy and collect tax both from the sub-contractor and the contractor, would be violative of Article 14 also for the reason that wherever a contractor executes a works contract himself without employing the sub-contractor, the deemed sale of goods involved in such execution of works contract would attract the tax only once and whenever the contractor employs a sub-contractor, the transfer of property in the same goods involved in the execution of such works contract attracts the tax twice, which is plainly irrational and violative of article 14 of the Constitution of India.
• Finally, the Andhra Pradesh High Court concluded that it is open for the State to frame appropriate rules to collect the same either from the sub-contractor or from the contractor, we emphasise, not from both. That means that tax can be collected from sub-contractor or from the contractor, but not from both.
The Supreme Court in State of Andhra Pradesh v. Larsen & Toubro Ltd. [2008] 17 VST 1 (SC) affirmed the above decision of AP High Court.
The Supreme Court explained that by virtue of Article 366(29A)(b) of the Constitution of India, once the work was assigned by the contractor the only transfer of property in goods would be by the sub-contractor, who was registered dealer, and who claimed to have paid the taxes under the Act on the goods involved in the execution of works.
Once the work was assigned by the assessee to the sub-contractor, the assessee ceased to execute the works contract in the sense contemplated by Article 366(29A)(b) because the property passed by accretion and there was no property in the goods with the contractor which was capable of re-transfer, whether as goods or in some other form. Thus, in such a case, the work executed by the sub-contractor resulted only in a single transaction and not multiple transactions.
The position emerging from the ruling of Larsen & Toubro Ltd. by the Andhra Pradesh High Court (affirmed by the Supreme Court) can be summed up as under:
• Sub-contractor is an agent of main contractor and has no privity of contract with contractee.
• Property in goods in a sub-contract works contract passes directly from the sub-contractor to the contractee and there can be only one sale recognised by legal fiction created under Article 366 (29A) of the Con-stitution of India.
• Taxation of contractor and sub-contractor on the same works contract (or a part thereof) would mean double taxation.
The above important principle laid down by the Supreme Court in the context of VAT, could be relevant for service tax, in appropriate cases.
- Taxability of sub-Contracted services under service tax – judicial considerations
• In regard to position for the period prior to 23.08.2007, based on relaxations granted through departmental clarifications, the matter stands settled by various judicial rulings viz.
• Urvi Construction vs. CST, (2010) 17 STR 302 (Tri.-Ahmd)
• CCE vs. Shivhare Roadlines (2009) 16 STR 335 (Tri.–Del)
• Harshal & Company vs. CCE (2008) 12 STR 574 (Tri.– Ahmd)
• Semac Pvt Limited vs. CCE (2006) 4 STR 475 (Tri.–Bang)
• Shiva Industrial Security Agency vs. CCE (2008) 12 STR 496 (Tri.– Ahmd)
• Synergy Audio Visual Workshop P. Ltd. vs. CST (2008) 10 STR 578 (Tri.– Bang)
• OIKOS vs. CCE, (2007) 5 STR 229 (Tri.–Bang)
• Viral Builders vs. CCE (2011) 21 STR 457 (Tri.– Ahd)
to the effect that there cannot be double taxation in cases where services are rendered by a person through another person to the ultimate consumer, as long as the main contractor who has the privity of contract with the final cus-tomer has paid service tax on the gross amount.
• Some of the important observations by judicial authorities as regards taxation of sub–contracted services are as under:
Vijay Sharma & Co. vs. CCE (2010) 20 STR 309 (Tri.–ND) (LB)
Para 9
It is true that there is no provision under Finance Act, 1994 for double taxation. The scheme of service tax law suggest that it is a single point tax law without being a multiple taxation legislation. In absence of any statutory provision to the contrary, providing of service being event of levy, self same service provided shall not be doubly taxable.
CCE vs. Areva T&D India Ltd (2011) 23 STR 33 (Tri – Chennai)
Para 6
……………..
The dispute relates to services rendered by the respondents to their customers utilising engineering firms as sub-contractors. The original authority held that the respondents have not rendered any “Repair Service”. It is not being disputed that the respondents are having contract for rendering services with the ultimate customers and they receive payment from them and ensure the quality of services rendered to them. Mere engagement of sub-contractors for some of the activities does not take away the role of respondents as service provider to their ultimate clients. The reasoning adopted by the original authority may lead to the conclusion that the respondents are not liable to pay any service tax at all in respect of activities undertaken through sub-contractors. Apparently, the implications are not being understood or appreciated by the original authority. From the facts of the case, it emerges that the respondents are rendering services to their ultimate customers and while rendering the said service, they are receiving services from the engineering firms appointed by them. They receive payment of service charges from the ultimate customers and part of it is paid to the sub-contractors for the services rendered by them and naturally the respondents are making some profits…………..
National Building Construction Corp Ltd vs. CCE & ST (2011) 23 STR 593 (Tri.–Kolkata)
In this case, NTPC awarded contract to NBCC who entrusted work for site formation and clearance to two sub-contractors and Demand raised against sub-contractors for providing service to NTPC on behalf of NBCC. The Tribunal observed as under:
Services were rendered by sub–contractor to main contractor who are answerable to NTPC, and no service was rendered by sub-contractors to NTPC on behalf of NBCC main contractor. Hence, no tax was demandable as a case of revenue neutrality & NBCC having paid tax on the entire amount received from NTPC.
- Taxability position of sub-contracted services
• For the period prior to 23-8-2007, it would appear that there was reasonable clarity based on department clarifications and judicial rulings to the effect that in case of sub-contracting of services, where the main contractor has discharged the service tax liability on the gross amount, there would be no liability to service tax at the end of the sub-contractor.
• For the period on or after 23-8-2007, based on department clarifications dated 23-8-2007, 6-5-2011 and 21-10-2011 stated above and subject to observations in paras (c) & (d) hereafter, it would appear that a better view would be that sub–contracted service provider (SCSP) is to be treated as an independent service provider and taxability needs to be determined based on appropriate service classification, applying the principles for classification of services contained in section 65A of the Act.
• In the context of works contract services, based on Supreme Court ruling in the L&T case discussed above, it can be contended that in case of sub-contracting, tax can be collected either from the sub-contractor or the main contractor, but not from both.
• In the absence of statutory provisions under service tax law as regards taxability of sub-contracted services, larger issue as to whether there can be liability at the end of sub-contractor at all, in cases where main contractor has discharged the service tax liability on the gross amount, remains judicially unresolved for the period on or after 23-8-2007.
• Taxability of sub-contracted services provided to SEZ Units are discussed separately.
Position on or after 01/07/2012
- Provisions u/s. 66F of the Finance Act, 1994 (Act)
Section 66F of the Act (principles of interpretation of specified description of services or bundled services) provides as under:
“(1) Unless otherwise specified, reference to a service (hereinafter referred to as main service) shall not include reference to a service which is used for providing main service.”
……………..
Para 9.1-1 of Guidance Note 9 of Education Guide issued by CBEC dated 20/06/2012 provides the following illustrations to explain this first rule of interpretation contained u/s. 66F of the Act:
“Provision of access to any road or bridge on payment of toll is a specific entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry.
Transportation of goods on an inland water-way is a specific entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the benefits of the negative list entry.”
From the above illustrations, it is clear that, as per section 66F(1), services procured for providing a service (main service) are not automatically classifiable under the same category as the main service. The above provision seems to confirm the position clarified by CBEC in May, 2011 and October, 2011 (referred earlier)
- Mega Exemption Notification No.25/2012 – ST dated 20/6/12 (Mega N 25)
Despite the fact that excepting provisions u/ s. 66F(1), no specific provisions have been made under service tax law in regard to taxability of sub-contracted services, significant exemptions have been granted to specific sections of sub–contracted services under Mega N25. The relevant entry is reproduced hereafter:
• Entry No. 29
“Services by the following persons in respective capacities –
(a) sub-broker or an authorised person to a stock broker;
(b) authorised person to a member of a commodity exchange;
(c) mutual fund agent to a mutual fund or asset management company;
(d) distributor to a mutual fund or asset management company;
(e) selling or marketing agent of lottery tick ets to a distributor or a selling agent;
(f) selling agent or a distributor of SIM cards or recharge coupon vouchers;
(g) business facilitator or a business corre spondent to a banking company or an insurance company, in a rural area; or
(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.”
• In addition to (a) above, sub-contracted services could be exempted from service tax, if they fulfill the criteria for entitlement to specific exemption under a notification (other than 10 lakh exemption). To illustrate:
Mega N25 (Entry No. 13)
“Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a building owned by an entity registered u/s. 12AA of the Income-tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;
(d) a pollution control or effluent treatment plant, except when located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;”
Mega N25 (Entry No. 14)
“Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) an airport, port or railways, including monorail or metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low-cost houses up to a carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the “Scheme of Affordable Housing in Partnership” framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
(d) post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or
(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;”
- Taxability position of sub-contracted services
• Subject to observations in paras hereafter, it would appear that, a better view would be that SCSP is to be treated as an independent service provider and taxability needs to be determined based on appropriate service & classification applying the principles contained in section 66F of the Act.
• In the context of works contract services, based on Supreme Court ruling in L&T case discussed earlier, it can be contended that in case of sub-contracting, tax can be collected either from the SCSP or the main service provider (MSP), but not from both.
• Despite the fact that specific exemptions have been granted to a large section of sub-contracted services, it is a well settled principle laid down by the Supreme Court to the effect that, an exemption cannot necessarily imply liability to tax/duty. Hence, the larger issue as to whether there can be liability at the end of SCSP at all in cases where MSP has discharged the service tax liability on the gross amount, needs to be tested judicially.
• Another point required to be noted is that all SCSPs do not necessarily enjoy the exemption that is available to MSP under Mega N25. For instance, certain services provided to the Government, local authority etc. are exempt under “entry No. 25” of the said Mega N25. However, when a sub-contractor is retained by MSP providing services to the Government, technically services provided by SCSP to MSP are not provided to the Government, Therefore unless SCSP enjoys exemption independently under any other entry, he would be liable for service tax in spite of the fact that his services are merged into the services of MSP who ultimately provides services to the Government.
• Taxability of sub-contracted services provided to SEZ units are discussed herein below:
Taxability of sub–contracted services provided to SEZ Units
The relevant extracts from Notification No. 40/2012–ST dated 20-6-2012 (“N40”) are as under:
“The exemption contained in this notification shall be subject to the following conditions, namely:-
(a)the exemption shall be provided by way of refund of service tax paid on the specified services received by a unit located in a SEZ or the developer of SEZ and used for the authorised operations:
Provided that where the specified services received in SEZ and used for the authorised operations are wholly consumed within the SEZ, the person liable to pay service tax has the option not to pay the service tax ab initio, instead of the SEZ unit or the developer claiming exemption by way of refund in terms of this notification.
Explanation – For the purposes of this notification, the expression “wholly consumed” refers to such specified services received by the unit of a SEZ or the developer and used for the authorised operations, where the place of provision determinable in accordance with the Place of Provision of Services Rules, 2012 (hereinafter referred as the POP Rules) is as under:-
(i) in respect of services specified in Rule 4 of the POP Rules, the place where the services are actually performed is within the SEZ ; or
(ii) in respect of services specified in Rule 5 of the POP Rules, the place where the property is located or intended to be located is within the SEZ; or
(iii) in respect of services other than those falling under clauses (i) and (ii), the recipient does not own or carry on any business other than the operations in SEZ;
…………………”
The substantive position of exemption in regard to services provided to SEZ units prior to 1-7-2012 continues with effect from 1-7-2012 as well, excepting consequential changes due to introduction of POP Rules in lieu of Rules for Export of Services/lImport of Services which were in force upto 30-6-2012.
According to one school of thinking, benefit of exemption under N 40 would not be available in regard to services availed by a MSP from a SCSP in regard to services provided by them for SEZ projects. This is supported by one or more of the following reasons:
• SCSP has privity of contract with MSP and has no independent legal relationship with SEZ clients of MSP. Hence, MSP is the recipient of Services provided by SCSP and not SEZ clients of MSP.
• According to department clarifications dated 23-8-2007, 6-5-2011 and 21-10-2011 and provisions of section 66F(1) of the Act, SCSP is to be treated as an independent service provider and taxability determined accordingly.
• Though according to Rule 10 of SEZ (Amendment) Rules, 2009 benefit of exemptions & concessions available to a Contractor shall also be available to sub-contractors read with section 51 of SEZ Act, it has been judicially held that, provisions of SEZ Act/Rules do not necessarily override the provisions of the relevant statute. [Reference can be made to UOI v. Essar Steel Ltd. (2010) 249 ELT 3 (GUJ) affirmed by Supreme Court – (2010) 255 ELT A 115]
According to an alternative school of thinking, benefit of exemption under N 40 would be available in regard to services availed by MSP from SCSP in regard to services provided by them for SEZ projects. This is supported by one or more of the following/reasons:
• SCSP has provided services on behalf of MSP to their SEZ clients. Hence, though privity of contract is between MSP and their SEZ clients, there is a constructive receipt of service by units located in SEZ from SCSP. Hence, benefit of N 40 would be available.
• Views expressed through department clarifications that, a SCSP is an independent service provider, has no statutory force. Hence, taxation at the end of SCSP results in multiple taxation which is not contemplated under the scheme of service tax law generally.
• Section 51 of SEZ Act read with Rule 10 of SEZ (Amendment) Rules, 2009 supports the contention that benefits available to a MSP should also be available to a SCSP.
Based on the above, it would appear that entitlement to the benefit of N 40 by a SCSP continues to be a contentious issue.
CENVAT credit on service tax paid on input services availed in connection with services provided by MSP to units in SEZ/developers of SEZ.
For availment of CENVAT credit under CENVAT Credit Rules, 2004 (CCR) on input services availed for “exported services”, it has been a settled position that, “exported services” are to be treated in the nature of “taxable services” and not “exempted services”. Hence, restrictions on availment of CENVAT credit under Rule 6 of CCR, would not apply and benefit of CENVAT credit of service tax paid on input services is available. However, whether services provided to a unit in SEZ/developer of SEZ, are to be treated as being in the nature of “exported services” or “exempted services” has also been a very contentious issue.
With effect from 1-3-2011, however, a new sub–rule (6A) has been inserted in Rule 6 of CCR to the effect that provisions of sub–rules (1), (2), (3) & (4) of Rule 6 of CCR shall not apply in cases when taxable services are provided, without payment of service tax to a unit in SEZ/developer of a SEZ for their authorised operations. Hence, with effect from 01/03/2011, benefit of CENVAT credit would be available on service tax paid on input services availed in connection with services provided to a unit in SEZ/developer of SEZ. This amendment has been given a retrospective effect, by the Finance Act, 2012. Hence, MSP can avail benefit of CENVAT Credit in cases where service tax is paid on services availed from SCSP for SEZ Projects on which Service tax has been paid by a MSP, subject to conditions stipulated under CCR.
