The government has issued a circular which is reproduced below. Jaiprakash Associates – a well known infrastructure contractor had made a representation wherein they appealed the government to give relief to sub - service providers (mind-well I am not using the term SUB CONTRACTOR) to infrastructure companies like the architects - so far so good - noble intentions are never rewarded - and thats the story - now read the circular - the question asked was X and the answer given is X+Y. I dont know why a contractor is exempt for constructing a road whereas an architect or an engineer is not - but holistically and strictly in accordance with today’s written law I tend to agree with the circular but the circular goes ahead and concludes that - sub-contractors are not exempt from providing these infrastructure services like roads.
The circular is saying that the classification of the service provided by the sub-service providers must be classified in categories other than WCS - that is absolutely correct as per law – how can an architect or an engineer be classified under WCS – but when the circular uses the word “sub-contractor” – the officers in the field with limited knowledge and unlimited views will take it to its illogical conclusion and this in turn will create big round of litigations. I will try to analyse this circular through a live example.
Example:
A XYZ company gets a contract to built a 100 kms highway from NHAI – he in turn sub-contracts 25 kms of it to another contractor on back to back basis and starts construction of the rest of the 75 kms by himself for which he appoints following outside agencies
- Engineering Firm
- Excavation company
- A company which will install the traffic signals and so on
The implication of the circular will be as under:
1. The sub-contractor who is going to construct the 25 kms of road will be fully exempt even though he is a sub-contractor as his service will still fall within the WCS head where roads are exempt
2. Engineering firm will be taxable as its services fall under consulting engineering services head (this was the legal position earlier also)
3. Excavation company will fall under the site preparation services – where there is a exemption notification for roads – hence it will not be taxable
4. The company which will install the traffic signals will be taxable as its services will fall within the erection services definition – here there will be problems as similar definition is there in WCS also – so now litigation will start on this.
All in all this circular will create big problems for people who classify there services in WCS even though the same are classifiable under different category. It is known fact that WCS is more specific category when material and labour are involved and VAT is applicable so the assessees will win hands down in such situations but the crux is that they will have to fight for something which is rightfully theirs.
Drafters of such sensitive circulars must take care and not play mischief with words – infrastructure works will get affected – no doubt.
Pls go thru the below circular:
Circular No. 138/07/2011 – Service Tax
F. No. 137/57/2011 – Service Tax
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Excise & Customs)
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New Delhi, the May 2011
To
Chief Commissioners of Central Excise & Customs (All)
Chief Commissioners of Central Excise (All)
Director General of Central Excise Intelligence
Director General of Audit & DGST
Commissioners of Service Tax (All)
Madam/Sir
Subject: Representation by Jaiprakash Associates Limited, Noida, in terms of Judgement dated 14.02.2011 in W.P. No. 7705 of 2008 – regarding
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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 subcontractors 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.
(iii) Attention is also invited to CIRCULAR NO 96/7/2007-ST, dated 23rd August, 2007 regarding clarification on technical issues relating to taxation of services under the Finance Act, 1994. The relevant portion is reproduced below,-
| 999.03 /23.08.07 | A taxable service provider outsources a part of the work by engaging another service provider, generally known as sub-contractor. Service tax is paid by the service provider for the total work. In such cases, whether service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work. | A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided. |
4. Therefore, it is clarified that the services provided by the subcontractors / consultants and other service providers are classifiable as per Section 65 A of the Finance Act, 1994 under respective sub clauses (105) of Section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.
Yours faithfully
(Deepankar Aron)
Director (Service Tax)
CBEC, New Delhi
