Commercial Construction Service

  • Important Definition

No specific definition of the Term”construction services” has been provided.  However, in declared services, it is provided that the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure

  • Accounting Code 

Such codes are no longer statutory but used for statistical purpose for the purpose of registration and for payment of tax as specified vide Circular No.165/16/2012 –ST dated 20.11.2012:

 

Tax Collection of Service Interest and penalties on such service
00440290 00440291

  • Provisions relating to Negative List

Commercial construction services are not included in the Negative List as specified under Section 66D of the Finance Act, 1994.  Rather, construction has been included as declared services as under:

  • construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority.

Explanation.— For the purposes of this clause,—

  • the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:––

(A)   architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

(B)   chartered engineer registered with the Institution of Engineers (India); or

(C)   licensed surveyor of the respective local body of the city or town or village or development or planning authority;

  • the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

  • Provisions relating to exemptions

  1. General Exemption
  • Small Service Provider

Vide Notification No 33/2012-ST, dated 20.06.2012 – Exemption to Small service providers having taxable turnover of less than 10 Lakhs and providing services other than by way of under a brand name.

  • Import of Technology

Vide Notification No. 14/ 2012-ST, dated March 17, 2012 – Exemption in respect of Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of R&D Cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986.

 

  • To Foreign Diplomatic missions and their personnel

Vide Notification No 27/2012-ST, dated 20.06.2012 – Exemption for all the taxable services provided by any person, for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

  • Services by TBI or STEP

Vide Notification No 32/2012-ST, dated 20.06.2012 – All taxable services provided by TBI or STEP have been exempted

  • Services provided to SEZ

Vide Notification No 40/2012-ST, dated 20.06.2012, all taxable services received by a Unit located in a Special Economic Zone (SEZ) or Developer of SEZ for the authorized operations, has been exempted from the levy of whole of the service tax.

  1. Specific Exemption

 

  • Notification No. 25/2012-ST, provides following exemption:

12. Services provided to the Government, a local authority or a governmental authority by way of erection, commissioning, installation of –

 (b)          a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(d)           canal, dam or other irrigation works;

(e)           pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

Prior to 01.04.2015, the following structures were also covered in exemption:

(a)           a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(c)           a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(f)            a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65B of the said Act;

However, this exemption has again been provided for contract entered prior to 01.3.2015 w.e.f 01-03-2016 by inserting new clause (12A) in Notification No. 25/2012 which reads as under:

12A.Services provided to the Government, a local authority or a governmental authority by way of constructionerection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of—

  1. a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
  2. a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or
  3. a residential complex predominantly meant for self-use or the use of their employees or other persons specified in theExplanation 1 to clause (44) of section 65B of the said Act;

under a contract which had been entered into prior to the 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:

 

Provided that nothing contained in this entry shall apply on or after the 1st April, 2020.

13. Services provided by way of erection, commissioning, installation 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;

(ba)         a civil structure or any other original works pertaining to the ‘In-situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers (w.e.f. 01-03-2016).

(bb)         a civil structure or any other original works pertaining to the Beneficiary-led individual house construction/enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (w.e.f. 01-03-2016);(c)     a building owned by an entity registered under section 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 located as a part of a factory; or

(e)           a structure meant for funeral, burial or cremation of deceased;

  1. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(a)   railways, including monorail or metro (Prior to 01-03-2016, metro and monorail were also included and prior to 01.4.2015, an airport or port were also covered)

(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 metres 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;

(ca) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under (w.e.f 01-03-2016):

(i)    the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

(ii)   any housing scheme of a State Government.(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;

14A.Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport or port provided under a contract which had been entered into prior to 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:

        Provided that Ministry of Civil Aviation or the Ministry of Shipping in the Government of India, as the case may be, certifies that the contract had been entered into before the 1st March, 2015:

        Provided further that nothing contained in this entry shall apply on or after the 1st April, 2020;

However, two sections 101 and 102 have been inserted in Finance Act, 1994 to provide retrospective relief in case of following contracts:

Section Particular of Services Period for which exemption granted
101 Taxable services of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of canal, dam and other irrigation work when provided to a governmental authority 01.07.2012-29.01.2014
102 Taxable services of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of non commercial civil structure or original works, structures meant for education, arts, clinical establishment, residential complex meant for persons specified in 65B(44) or their employees when provided to Government, local authority or a governmental authority in case of contracts entered prior to 01-03-2015 01.04.2015-29.02.2016

  • Provisions relating to Valuation and Abatement

Section 67 read along with Service Tax (Determination of Value) Rules, 2006 provides the manner of determining the value of taxable services on which services tax should be levied.

In respect of Construction Services, whe such services qualify as works contract is provided as under:

Type of Works Contract Options Manner of computation of service tax
Original Works

(a) “original works” means-

(i)    all new constructions;

(ii)   all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii)   erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

In other cases Service tax shall be payable on 40% cent of the total amount including such gross amount.

 

in case of works contract, not covered under sub-clause (A), including works contract entered into for,—

(i)  maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii)  maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent of the total amount charged for the works contract.

Service tax shall be payable on

70% of the total amount charged for the works contract

Further, abatement has been provided when value of land is included in consideration for construction services like sale of constructed villas etc.  Relevant clause reads as under:

Vide Notification No. 26/2012 dated June 20, 2012 as amended vide Notification No. 9/2013 dated May 8, 2013 (superseding Notification No. 2/2013), the abatement and conditions thereof are provided as follows:

“12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,- (i) Cenvat credit on inputs used for providing the taxable service has not been taken under the provisions of the Cenvat Credit Rules, 2004;
(a) for a residential unit satisfying both the following conditions, namely:–

 

(i) the carpet area of the unit is less than 2000 square feet; and

(ii) the amount charged for the unit is less than rupees one crore;

25 (ii) The value of land is included in the amount charged from the service receiver.”
(b) for other than the (a) above. 30

Notification No. 26/2012, dated June 20, 2012 has granted abatement on the above mentioned services subject to the following conditions:

(i)    Cenvat credit on inputs used for providing the taxable service has not been taken under the provisions of the Cenvat Credit Rules, 2004.

(ii)   The value of land is included in the amount charged from the service receiver.

However, w.e.f 01-04-2016, single abatement percentage @ 70% has been provided in respect of Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority.

Levy of Service Tax on Free of cost material provided by Contractee

It has been always a dispute that while taking benefit of Valuation Rules or abatement, the value of free goods supplied by contractee be added to the consideration received by the asseessee to arrive at true value of service portion in the contract.  i.e. to say that the arrangement of provision of free material of goods provides extra benefit to contractor as the intent of law was to provide abatement / value determination from total value of contract.  However, the matter has been decided by Larger Bench in the case of of Bhayana Builders P. Ltd. v CST, Delhi (Tribunal – LB) wherein Hon’ble Tribunal examined the scope of Section 67 as under:

“(iv)      The expression “consideration” occurring in the U.P. Imposition of Ceiling on Land Holdings Act, 1961 fell for consideration in Ku. Sonia Bhatia v. State of U.P. and Others – AIR 1981 SC 1274 the Court explained that since the expression “consideration” was not defined in the U.P. Act, its meaning as derived from the definition of the expression in Section 2(d) of the Contract Act, 1872 could be considered. After considering the definition of the expression in the Contract Act and referring to Black’s Law Dictionary; other dictionaries, English judgments and Corpus Juris Secundum, the Supreme Court held that : the in escapable conclusion that follows is that consideration means a reasonable equivalent for other valuable benefit passed on by the promisor to the promisee or by the transfer of to the transferee.

(v) Clearly, Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. “Free supplies”, incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient.

(vi) In Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India – 2013 (29) S.T.R. 9 (Del.), the Delhi High Court was essentially considering a challenge of the validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006. This provision was challenged to the extent it includes reimbursement of expenses in the value of taxable services for the purpose of levy of service tax. Apart from the challenge to its constitutionality, the provision was challenged on the ground that it is ultra vires the provisions of Sections 66 and 67 of the Act. The High Court held that Section 66 of the Act levies tax only on the taxable services; that this is an inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of Section 67; that on construing the provisions of Sections 66 and 67(1)(i) together and harmoniously, it is clear that the value of taxable service shall be the gross amount charged by the service provider; and nothing more and nothing less than the consideration paid as a quid pro quo for the service can be brought to charge. The High Court further held that the common thread that runs through Sections 66 and 67 and 94 (the Rule making power), manifests that only the service actually provided by the service provider can be valued and assessed to tax. The High Court concluded that the provisions of Rule 5(i) of the valuation Rules are repugnant to Sections 66 and 67 of the Act since the provision purport to tax not, what is due from the service provider under the charging section, but seeks to extract something more from him by including in the valuation of the taxable service other expenditure and costs which are incurred by the service provider in the course of providing taxable service.

(vii) In the light of the clear Legislative text, the unambiguous provisions of Sections 66 and 67 of the Act and in the light of the judgment in Intercontinental Consultants and Technocrats Pvt. Ltd. (supra), the conclusion is compelling and inviolable that the value “free supplies” by a construction services recipient, for incorporation in the constructions would not constitute a non-monetary consideration to the service provider nor form part of the gross amount charged for the services provided. Whether the legislature may enact that the value of “free supplies” should be included in the value of the service provided for levy of tax; and within its legislative competence, is an aspect that is speculative for the nonce and outside the purview of either the substantive appeals or the issue referred to us. In this view of the matter it is not necessary to consider the contention on behalf of the assessees that an interpretation that Section 67 of the Act enables or mandates inclusion of the value of goods and materials incorporated into construction services (whether provided by the service provider or as a free supplies by the service recipient) would render the legislative provision unconstitutional, since value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. Ld. Counsel placed reliance on the judgment in M/s. Gannon Dunkerley and Co. and Others v. State of Rajasthan and Others – (1993) 1.”

In conclusion, the Hon’ble Court held that “from the several aids to interpretation, referred to (supra) we are compelled to conclude that goods and materials, supplied/provided/used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/provision/use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/goods incorporated or otherwise, would alone constitute the gross amount charged.”

Thus, it was held that free of cost material provided by Contractee would not for part of Gross valuation for the purpose of applying valuation /abatement.

  • Provisions relating to Cenvat Credit

The Credit is available to the service provider of the duty or tax paid on ‘capital goods’, ‘inputs’ and ‘input services’. Since all the services relating to erection, commissioning and installation are taxable, the provider of service will get the credit of excise duty paid on capital goods, input and service tax paid on input services as defined in Cenvat Credit Rules, 2004.  Howeevr, restriction of Cenvat Credit when inputs and input services are incorporated in civil and immovable structures has to be examined.

  • Provisions relating to point of taxation

As per Rule 3 of Point of Taxation Rules, 2011, the point of taxation shall be-

  1. Time when the invoice for the service provided or to be provided is issued. As per Rule 4A of Service Tax Rules, invoice shall be issued within 30 days from the date of completion of service. In case invoice is not issued within 30 days from the completion of service, the point of taxation shall be the date of completion of service.
  2. In case where the person providing the service receives payment before the time specified above, the date of receipt of payment shall be the point of taxation.

If the period of providing the service is more than 3 months, it will be considered as continuous service as defined in rule 2(c) of Point of Taxation Rules, 2011. Accordingly, proviso to rule 3 of Point of Taxation Rules will apply for determining date of the completion of service.

  • Provisions relating to Place of Provision of Service Rules, 2012

The Place of Provision of Service Rules, 2012 contains different rules for different nature of services. Since Construction services are required to be performed in relation to immovable property, Rule 5 of Place of Provision Rules, 2012 is relevant for this category of service is as follows:

Rule 5:   The place of provision of services provided directly in relation to an immovable property, including services provided in this regard by experts and estate agents, provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including architects or interior decorators, shall be the place where the immovable property is located or intended to be located.

Thus if the property is located within taxable territory, services shall be taxable, else not.

  • Provisions relating to reverse charge

ActivityWhether falls within the scope of present serviceReference
The activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment are covered under the works contract and not under sale.YesRaheja Development Corporations Vs State of Karnataka [2005 NTC (Vol. 27)-243]
Tribunal held that water supply project is an infrastructure facility and a civic amenity that a state provides in public interestNoThe Indian Hume Pipe Co. Ltd. v CCE, Tcrichy [2008 (12) STR 363]
Activity of laying of pipeline system for GWSSB for supplying drinking water to Gram Panchayat.NoNagarjuna Constructions v CCE, Hyderabad [2010 (19) STR 259]
Finishing servicesYesSpandrel, Hyderabad v CCE, Hyderabad [2010 (20) STR 129 (Tri. Bang)]
Shifting of overhead cables/ wires for any reasons such as widening/renovation of roadsNoCircular No. 123/05/2010-ST, dated 24-5-2010
Laying of cables under or alongside roadsNoCircular No. 123/05/2010-ST, dated 24-5-2010
Laying of electric cablesNoCircular No. 123/05/2010-ST, dated 24-5-2010
between grids/sub-stations/ transformer stations en route
Laying of electric cables up to distribution point of residential or commercial localities/NoCircular No. 123/05/2010-ST, dated 24-5-2010
complexes
Laying of electric cablesYesCircular No. 123/05/2010-ST, dated 24-5-2010
beyond the distribution point of residential or commercial localities/complexes
Railway electrification,NoCircular No. 123/05/2010-ST, dated 24-5-2010
electrification along the
railway track
The value of Construction Of Complex Together With Construction Of Road will be taxable if the two are not separableYesF.NO. B1/6/2005-TRU, dated 27.07.2005
Commercial concern provising construction, repairs, alterations, restorations, services of building civil structures or part thereof YesCircular No. 80/10/2004-Service Tax dated 17-9-2004
Commercial or industrial construction services and execution of work, contract for construction of a portNoLetter F. No. B1/16/2007-TRU
Canal system built by governmentNoCircular No. 116/10/2009 – Service Tax dated 15-9-2009
Dams built by government through EPC modeNoCircular No. 116/10/2009 – Service Tax dated 15-9-2009

  • Related Circulars and Notification

  • Circular no. 80/10/2004-S.T., dated 17-9-2004 (relevant extract)
  • Circular F. No. B1/6/2005-TRU, dated 27-7-2005 (extract)
  • Letter F.No. B1/16/2007-TRU, dated 22-5-2007
  • Circular no. 116/10/2009-S.T., dated 15-9-2009
  • Relevant extract of ministry’s Circular letter D.O.F. no. 334/1/2010-TRU, dated 26-2-2010
  • Circular no. 123/05/2010-ST, dated 24-5-2010- applicability of service tax on laying of cables under or alongside roads and similar activities.
  • F. (D.R.) Order no. 1/2010, dated 22-6-2010
  • Relevant extracts of letter D.O.F. no. 334/03/2010-TRU, dated 1-7-2010
  • Circular No. 80/10/2004-S.T., dated 17-9-2004 (Relevant Extract)-

13.1 Services provided by a commercial concern in relation to construction, repairs, alteration or restoration of such buildings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done by a building or civil contractor. Estate builders who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor/contractors, the payment made to such contractor would be subjected to service tax under this head. The tax is limited only in case the service is provided by a commercial concern. Thus service provided by a labourer engage d directly by the property owner or a contractor who does not have a business establishment would not be subject to service tax.

13.2 The leviability of service tax would depend primarily upon whether the building or civil structure is ‘used, or to be used’ for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such construction which are for the use of organizations or institutions being established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable, being non-commercial in nature. Generally, Government buildings or civil constructions are used for residential, office purposes or for providing civic amenities. Thus, normally Government constructions would not be taxable. However, if such constructions are for commercial purposes like local Government bodies getting shops constructed for letting them out, such activity would be commercial and builders would be subjected to service tax.

13.3        In case of multipurpose buildings such as residential-cum-commercial construction, tax would be leviable in case such immovable property is treated as a commercial property under the local /municipal laws.

13.4 The definition of service specifically excludes construction of roads, airports, railway, transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified that any pipeline other than those running within an industrial and commercial establishment such as a factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction of pipeline running within such an industrial and commercial establishment is within the scope of the levy.

13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-S.T.) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost (Refer Notification No. 15/2004-S.T.,dated 10-9-2004). This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under Notification No. 12/2003-S.T.) of exemption towards cost of goods are availed.

  • Circular No. B1/6/2005-TRU, dated 27-7-2005(extract)

14.1 Construction of new buildings or civil structures used for commercial or industrial purposes and repair, alteration or restoration activities of such buildings and civil structures was already liable to service tax since 2004. In this year’s budget, such construction service has been renamed as ‘commercial and industrial construction service’ under section 65(25b) of the Finance Act, 1994 and renovation of a commercial or industrial building or civil structure has now been specifically included within the purview of service tax.

14.2 Post-construction completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, especially if undertaken as an isolated or stand alone contract, are also specifically included. Thus post-construction completion and finishing services are specifically included in the definition of commercial or industrial construction services.

14.3 Construction of pipeline or conduit has been included within the purview of service tax. Thus, the construction of long distance pipeline which was earlier excluded from the coverage of construction services would now be liable to service tax. Repair, alteration, renovation or restoration of pipeline or conduit would now be liable to service tax. This levy would also be applicable for such activities performed on the old pipeline or conduits constructed before this levy has come into force.

14.4 At present, services rendered for construction of commercial or industrial buildings is taxable. However, construction of roads is not liable to service tax. A point has been raised that if a commercial complex is constructed which also contains roads whether the value of construction of roads would be liable to service tax.

14.5 If the contract for construction of commercial complex is a single contract and the construction of road is not recognized as a separate activity as per the contract, then the service tax would be leviable on the gross amount charged for construction including the value of construction of roads.

 14.6 When services provided under a contract consist of a number of different elements, a view has to be taken on the basis of the facts and circumstances of each case as to whether the service provider has made a single overall supply or a supply of different services which are to be treated differently.

  • Letter F.No. B1/16/2007-TRU

8.4 Construction of ports is specifically exempted from levy of service tax under commercial or industrial construction service [section 65(25b)] vide Notification No. 16/2005-Service Tax, dated 7-6-2005. Construction of ports under the newly introduced commercial or industrial construction service provided in relation to the execution of works contract under section 65(105)(zzzza) has also been exempted. Accordingly, Notification No. 16/2005-Service Tax, dated 7-6-2005 has been rescinded and a combined Notification No. 25/2007-Service Tax, dated 22-5-2007 has been issued exempting commercial or industrial construction service, and services provided in relation to the execution of works contract, provided to any person by any other person in relation to construction of a port or other port. However, services such as completion  and finishing, repair, alteration, renovation, restoration, maintenance or repair provided in relation to existing port or other port shall be outside the scope of this exemption and hence, leviable to service tax.

  • Circular No. 116/10/2009-S.T., dated 15-9-2009

On a reference being received by the Board, two following issues were examined for a clear understanding of facts. The first is regarding leviability of service tax on construction of canals for Government projects.

  1. As per section 65(25b) of the Finance Act, 1994 “commercial or industrial construction service” means—

(a)   construction of a new building or a civil structure or a part thereof; or

(b)   construction of pipeline or conduit; or

(c)   completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joiner and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d)   repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is –

(i)    used, or to be used, primarily for; or

(ii)   occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

  1. Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.
  1. The second issue is about Government taking up construction activity of dams, buildings or infrastructure construction etc. through EPC (Engineering Procurement & Construction) mode. The said service is covered under section 65(105)(zzzza) of Finance Act, 1994. The said section itself excludes works contract in respect of dams, roads, airports, railways, transport terminals, bridges and tunnels executed through EPC mode. Hence works contract in respect of above works even if done through EPC mode are exempt from payment of service tax.
  • Relevant Extract of Ministry’s Circular Letter D.O.F. No. 334/1/2010-TRU),dated 26-2-2010
  1. Service tax on construction services

8.1 The service tax on construction of commercial or industrial construction services was introduced in 2004 and that on construction of complex was introduced in 2005.

8.2 As regards payment made by the prospective buyers/flat owners, in few cases the entire consideration is paid after the residential complex has been fully developed. This is in the nature of outright sale of the immovable property and admittedly no service tax is chargeable on such transfer. However, in most cases, the prospective buyer books a flat before its construction commencement/completion, pays the consideration in installments and takes possession of the property when the entire consideration is paid and the construction is over.

8.3 In some cases the initial transaction between the buyer and the builder is done through an instrument called ‘Agreement to Sell’. At that stage neither the full consideration is paid nor is there any transfer in ownership of the property although an agreement to ultimately sell the property under settled terms is signed. In other words, the builder continues to remain the legal owner of the property. At the conclusion of the contract and completion of the payments relating thereto, another instrument called ‘Sale Deed’ is executed on payment of appropriate stamp duty. This instrument represents the legal transfer of property from the promoter to the buyer.

8.4  In other places a different pattern is followed. At the initial stage, instruments are created between the promoter and all the prospective buyers (which may include a person who has provided the vacant land for the construction), known as ‘Sale Of Undivided Portion of The Land’. This instrument transfers the property right to the buyers though it does not demarcate a part of land, which can be associated with a particular buyer. Since the vacant land has lower value, this system of legal instrumentation has been devised to pay lesser stamp duty. In many cases, an instrument called ‘Construction Agreement’ is parallely executed under which the obligations of the promoter to get property constructed and that of the buyer to pay the required consideration are incorporated.

8.5 These different patterns of execution, terms of payment and legal formalities have given rise to confusion, disputes and discrimination in terms of service tax payment.

8.6 In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged.

  • Circular No. 123/05/2010-ST, dated 24-5-2010

Disputes have arisen in some parts of the country regarding applicability of service tax on certain activities such as shifting of overhead cables to underground on account of renovation/widening of roads; laying of electrical cables under or alongside roads/railway tracks; between grids/sub-stations/transformers the distribution points of residential or commercial complexes and such activities as electrification of railways, installation of street lights, traffic lights, flood lights. This clarification takes into account the taxability of different activities taking into account the scope of all services (such as site formation/excavation/earth-moving service, commercial or industrial construction services; erection, commissioning or installation services; or works contract service) that are presently taxable as well as those which are covered under the Finance Act, 2010.

  1. Scope of certain taxable services in brief :

(i)    ‘Commercial or industrial construction services’, in brief, cover construction of and the completion, finishing, repair, alteration, renovation, restoration or similar activities pertaining to buildings, civil structures, pipelines or conduits. Therefore, only such electrical works that are parts of (or which result in emergence of a fixture of) buildings, civil structures, pipelines or conduits, are covered under the definition of this taxable service. Further, such activities undertaken in respect of roads, railways, transport terminals, bridges, tunnels and dams are outside the scope of levy of service tax under this taxable service.

(ii)   Under ‘Erection, commissioning or installation services’, the activities relevant to the instant issue are (a) the erection, commissioning and installation of plant, machinery, equipment or structures; and (b) the installation of electrical and electronic devices, including wiring or fitting therefor. Thus, if an activity does not result in emergence of an erected, installed and commissioned plant, machinery, equipment or structure or does not result in installation of an electrical or electronic device (i.e. a machine or equipment that uses electricity to perform some other function) the same is outside the purview of this taxable service.

(iii) ‘Works contract’ incorporates the inclusions and exclusions of the aforementioned two taxable services (amongst others) and it is the nature of the contract (i.e. a contract wherein the transfer of property in goods involved is leviable to a tax as sale of goods) rather than the nature of activities undertaken, that distinguishes it from the previously stated taxable services. Thus, even in the case of ‘works contract’ if the nature of the activities is such that they are excluded from aforesaid two services then they would generally remain excluded from this taxable service as well.

(iv)  ‘Site formation and clearance, excavation, earth-moving and demolition services’ are attracted only if the service providers provide these services independently and not as part of a complete work such as laying of cables under the road.

  1. The taxable status of various activities, on which disputes have arisen.

Based on the foregoing, the following would be the tax status of some of the activities in respect of which disputes have arisen,—

S.No. Activity Status

 

1. Shifting of overhead cables/ wires for any reasons such as widening/renovation of roads Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
2. Laying of cables under or alongside roads

 

Not a taxable service under any clause of sub-section (105)of section 65 of the Finance Act, 1994
3. Laying of electric cables

between grids/sub-stations/ transformer stations en route

Not a taxable service under any clause of sub-section (105)of section 65 of the Finance Act, 1994
4. Installation of transformer/ sub-stations undertaken independently Taxable service, namely erection, commissioning or installation services [section 65(105)(zzd)]
5. Laying of electric cables up to distribution point of residential or commercial localities/

complexes

Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994

 

6. Laying of electric cables

beyond the distribution point of residential or commercial localities/complexes

Taxable service, namely commercial or ‘industrial construction’ or ‘construction of complex’ service [section 65(105)(zzq)/(zzzh)], as the case may be

 

7. Installation of street lights, traffic lights, flood lights, or other electrical and electronic

appliances/devices or

providing electric connections to them

Taxable service, namely erection, commissioning or

installation services [section

65(105)(zzd)]

 

 

8. Railway electrification,

electrification along the

railway track

 

Not a taxable service under

any clause of sub-section (105)

of section 65 of the Finance

Act, 1994

  1. The conclusions drawn above are essentially general in nature and would have to be applied in an individual case depending upon its facts and circumstances. The pending disputes/cases maybe decided based on the clarifications contained in this Circular.
  • F. (D.R.) ORDER NO. 1/2010, dated 22-6-2010

In exercise of the powers conferred by sub-section (1) of section 95 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, hereby makes the following Order, namely :—

  1. (1) This Order may be called as the Service Tax (Removal of Difficulty) Order, 2010.

(2) This Order shall come into force on the 1st day of July, 2010.

  1. For the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, the expression ‘authority competent’ includes, besides any Government authority,—

(i)    architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

(ii)   chartered engineer registered with the Institution of Engineers (India); or

(iii) licensed surveyor of the respective local body of the city or town or village or development or planning authority; who is authorised under any law for the time being in force, to issue a completion certificate in respect of residential or commercial or industrial complex, as a precondition for its occupation.

  • Relevant Extracts of Letter DoF No. 334/03/2010-TRU, dated 1-7-2010
  1. Construction services:

6.1 In the Finance Act, changes have been made in the construction services, both commercial construction and construction of residential complex, using ‘completion certificate’ issued by ‘competent authority’. Before the issuance of completion certificate if agreement is entered into or any payment is made for sale of complex or apartment in residential complex, service tax will be leviable on such transaction since the builder provides the construction service. Completion certificate issued by a Government authority was prescribed as demarcation by introducing an Explanation in the Finance Act. During the post budget discussions, it was pointed that practice regarding issuance of completion certificates varies from State to State. Considering the practical difficulties, the scope of the phrase ‘authority competent’ to issue completion certificate has been widened by issuing an order for removal of difficulty (Refer M.F. (D.R.) Order No. 1/2010, dated 22nd June, 2010). Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.

6.2 After the Budget was introduced views were expressed that the tax liability on construction sector has been tightened at a time when the sector was recovering after recession. After considering the issue, abatement available for construction of industrial or commercial complex and also residential complex has been prescribed as seventy five per cent. This means now tax incidence will be the rate of service tax applied on twenty five per cent of gross value of commercial or residential complex or unit, broadly representing the service component in the construction, subject to conditions (Refer Notification No. 29/2010-Service Tax, dated 22nd June, 2010). Importantly seventy five per cent abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.

Exemption has been provided for construction of residential complex service, when the same is rendered as part of Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Rajiv Awaas Yojana (Refer Notification No. 28/2010-Service Tax, dated 22nd June, 2010). These are flagship schemes of the Government of India to provide shelter for the poor and the disadvantaged and hence taxable service of construction of complex in the context of these two development schemes have been kept out of the ambit of service tax.

 

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By | 2017-04-06T10:49:02+00:00 September 19th, 2016|Service Wise Implications|

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