Works Contract Under GSTvis-a-vis Plant and Machinery

Introduction

Under earlier regime, the
term ‘works contact’ had a wide meaning. Whether the contract related to
immovable property or movable property, any contract, if involved in both
supply of goods as well as supply of services, it used to be referred to as
works contract.

But, under GST, there is
defined meaning of ‘works contract’ and the scope of the term ‘works contract’
is narrowed down. The definition of ‘works contract’, as given in section
2(119) of the CGST Act, is reproduced below for reference.

“(119) “works contract”
means a contract for building, construction, fabrication, completion, erection,
installation, fitting out, improvement, modification, repair, maintenance,
renovation, alteration or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in some other form) is
involved in the execution of such contract;”

It can be seen, from the
above definition, that now only those contracts (for supply of goods and
services as specified) will be treated as ‘works contract’ which are relating
to immovable property.

In other words, if the
transaction of supply of goods and services is relating to movable property, it
will not be a ‘works contract’.

Situation of Plant and
machinery  

Plant and machinery, which
is installed in a factory, can also be covered in the scope of works contract,
if the upcoming plant and machinery is in the nature of immovable property.
Whether upcoming plant and machinery is movable property or immovable property
may be a debatable issue and it will depend upon the facts of each case.

There are different
judgments laying down criteria for deciding the nature of plant and machinery.

Sirpur Paper Mills Ltd. vs. Collector of
Central Excise, Hyderabad (1998 (1) SCC 400).   

In this case, the issue
arose whether Paper Mill is movable property or immovable property. Hon’ble
Supreme Court has observed as under; 

“In view of this finding of
fact, it is not possible to hold that the machinery assembled and erected by
the appellant at its factory site was immovable property as something attached
to earth like a building or a tree. The tribunal has pointed out that it was
for the operational efficiency of the machine that it was attached to earth. If
the appellant wanted to sell the paper making machine it could always remove it
from its base and sell it. Apart from this finding of fact made by the
Tribunal, the point advanced on behalf of the appellant, that whatever is
embedded in earth must be treated as immovable property is basically not sound.
For example, a factory owner or a house-holder may purchase a water pump and
fix it on a cement base for operational efficiency and also for security. That
will not make the water pump an item of immovable property. Some of the
component of water pump may even be assembled on site. That too will not make
any difference to the principle. The test is whether the paper making machine
can be sold in the market. The Tribunal has found as a fact that it can be
sold. In view of that finding, we are unable to uphold the contention of the
appellant that the machine must be treated as a part of the immovable property
of the company. Just because a plant and machinery are fixed in the earth for
better functioning, it does not automatically become an immovable property. A
further argument was made that the entire machinery as it is cannot be bought
and sold because the machinery will have to be dismantled before being sold.
The Tribunal has pointed out that the appellant had himself bought several
items and completed the machinery. It had purchased a large number of
components and fabricated a few and manufactured the paper making machine at
site. If it is sold it has to be dismantled and reassembled at another site. We
do not find any fault with the reasoning of the Tribunal on this aspect of the
matter.”

Thus, on the given facts,
Hon. Supreme Court has held the plant and machinery of the mill is movable
property.

Duncans Industries
Ltd. vs. State Of U.P. & Ors JT 1999 
9  SC 421 on 3 December, 1999

This is a subsequent case,
wherein again Hon. Supreme Court had an occasion to decide the nature of plant
and machinery installed in the factory. The relevant observations are as under:

“Therefore, it came to the
conclusion that these machineries were immovable property which were
permanently attached to the land in question. While coming to this conclusion
the learned Judge relied upon the observations found in the case of Reynolds
vs. Ashby & Son (1904 AC 466) and Official Liquidator vs. Sri
Krishna Deo & Ors. (AIR 1959 All. 247). We are inclined to agree with
the above finding of the High Court that the plant and machinery in the instant
case are immovable properties. The question whether a machinery which is
embedded in the earth is movable property or an immovable property, depends
upon the facts and circumstances of each case. Primarily, the court will have
to take into consideration the intention of the parties when it decided to
embed the machinery, whether such embedment was intended to be temporary or
permanent. A careful perusal of the agreement of sale and the conveyance deed
along with the attendant circumstances and taking into consideration the nature
of machineries involved clearly shows that the machineries which have been embedded
in the earth to constitute a fertiliser plant in the instant case, are
definitely embedded permanently with a view to utilise the same as a fertiliser
plant. The description of the machines as seen in the Schedule attached to the
deed of conveyance also shows without any doubt that they were set up
permanently in the land in question with a view to operate a fertiliser plant
and the same was not embedded to dismantle and remove the same for the purpose
of sale as machinery at any point of time. The facts as could be found also
show that the purpose for which these machines were embedded was to use the
plant as a factory for the manufacture of fertiliser at various stages of its
production. Hence, the contention that these machines should be treated as movables
cannot be accepted.”

Thus, in this case the Hon.
Supreme Court has considered the installed plant and machinery as immovable
property.

Conclusion     

If the transaction of
installation of plant and machinery is considered to be immovable property, the
transaction will be ‘works contract’ and therefore it will be treated as a
transaction of supply of service under GST Act.

Thus, being a service
transaction, the tax will be attracted as one transaction of supply of service.

However, if the transaction
is considered to be for movable property, it will be a transaction of ‘mixed
supply’ or ‘composite supply’ and tax rate will be decided accordingly.

Thus, determination of
nature of transition of installation of plant and machinery is very much
relevant for deciding the correct rate applicable under GST. _