Erection, Commissioning or Installation Services

September 19, 2016   admin  Service Wise Implications
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Any service provided or to be provided to any person, by any person in relation to erection, commissioning or installation.

  • Important Definition

  • No specific definition has been provided in Finance Act, 1994 relating to this service category

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  • Accounting codes

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:

 

  • Provision relating to Negative List

Erection, Commissioning or installation services are not included in the Negative list as specified under section 66D of the Finance Act, 1994.

  • 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 Exemptions
  • Notification No. 25/2012-ST, provides following exemption:
  1. 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;

  1. 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, excluding monorail or metro (Prior to 01-03-2016, monorail and metro were also covered 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) mechanized 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, this exemption has again been provided in respect of contracts entered into prior to the 1st March, 2015 w.e.f 01-03-2016 by inserting new clause (12A) in Notification No. 25/2012 which reads as under:

Specific Exemption for contruction contract entered prior to 01.03.2015

The following provisions have been introduced to provide for exemption to activities under taken on specified government buildings under a contract entered prior to 01.3.2015:

  1. In Notification No. 25/2012-Service Tax dated 20.06.2012

12A.Services provided to the Government, a local authority or a governmental authority by way of construction, erection, 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 the Explanation 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.

  1. In Finance Act, 1994 further, section 101 and 102 has 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 Erection, commissioning or installation 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

Circular No 59/8/2003, dated 20.06.2003 provides that in case of turnkey projects, if the service provider shows break up of commissioning or installation charges, then service tax would be chargeable only upon such amount and not upon the value of material or goods supplied.

  • 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.

  • 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 erection, commissioning services are required to be performed either in relation to movable goods or immovable property, the two set of Rules from Place of Provision Rules, 2012 as relevant for this category of service is as follows:Rule 4:   services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service :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.

  •  Provisions relating to reverse charge

  • If services of Erection, Commissioning or installation qualifies as works contract, liability on recipient of services has been provided as under:
    Description of Service Service Provider Service Recipient % of service tax payable by the person providing service

     

    % of service tax payable by the person receiving the service

     

    In respect of services provided or agreed to be provided in execution of  works contract

     

    Any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons located in the taxable territory To any business entity registered as body corporate located in the taxable territory 50% 50%

     

    In other cases, Erection, Commissioning or installation service is not included under the mechanism of Reverse Charge. Hence, the person providing the service shall be the person liable to pay service tax.

  • Taxability as settled by precedents / Circulars / Trade notices

ActivityWhether falls within the scope of present serviceReference
Payment of excise duty on the erection and commissioning charges – whether Service Tax payable?YesLincoln Helios (India) Ltd Vs CCE [2006 (1) S.T.R. 302 (Tri. - Bang.)]
Installation of weigh bridgesNoLeotronics Scales (P) Ltd. v CCE, Jalandhar 2008-TIOL-184-CESTAT DEL
Activity of lying long distance pipelineNoIndian Hume Pipe Co Ltd V CCE (2008) 16 STT 136
Installation of transformer/sub-stations undertaken independentlyYesCircular No. 123/05/2010-ST, dated 24-5-2010
Installation of street lights, traffic lights, flood lights, or other electrical and electronic appliances/devices or providing electric connections.YesCircular No. 123/05/2010-ST, dated 24-5-2010
Laying of pipelinesNoIndian Hume Pipe Co Ltd V CCE, Trichy 2008 TIOL 1689 CESTAT MAD
Installation of booster motors, air conditioners etc.YesCircular No 62/11/2003, dated 21.08.2003
Installation an commissioning of medical equipmentNoAllengers Medical Systems Ltd V CCE, Chandigarh 2009 (14) STR 235 (Tri Del)
Any charge other than commissioning or installation chargesNoCircular No. 59/8/2003 dated 20-6-2003

  • Related Circulars and Notification

  • Circular no. 59/8/2003, dated 20-6-2003,as amended by Circular no. 62/11/2003-ST, dated 21-8-2003
  • Circular no. 62/11/2003-ST, dated 21-8-2003
  • Circular no. 80/10/2004-S.T., dated 17-9-2004
  • Relevant extracts of D.O.F. letter no. 334/1/2010-TRU, dated 26-2-2010
  • Circular no. 123/05/2010-ST, dated 24-5-2010

 

  • Circular 59/8/2003, dated 20-6-2003, as amended by Circular No. 62/11/2003-ST, dated 21-8-2003
  1. Certain doubts have been raised in case of commissioning or installation. In this regard, the following is clarified,—
  1. In case of commissioning and installation it has been pointed out that in case of turnkey project, the contract may be indivisible and no separate value could be assigned to commissioning or installation of goods. Doubts have also been raised as to what would be the value of taxable service. It is clarified that it has been provided in law that service tax is leviable on commissioning or installation charges only and not on the material and goods supplied.

However, it is upto the service provider to show the break-up of commissioning or installation charges. In case service provider shows consolidated charges, service tax would be leviable on such consolidated amount.

  1. A doubt has been raised as to whether charges for erection of plant are covered under the service tax or only commissioning and installation charges. It is clarified that the law specifically provides for taxation of commissioning and installation of plant, machinery or equipment. Thus all activities other than the commissioning and installation of the plant/machinery/equipment perse, will not be chargeable to service tax.

 

  • Circular 62/11/2003-ST, DATED 21-8-2003

Commissioning or installation of plant, equipment or machinery by a commissioning or installation agency, is chargeable to service tax. A doubt has been raised as to whether the services like a plumber putting up a water tank, fitting pipes and tubing, an electrician putting up electric wire and fittings, installation of booster motors, air-conditioners, water filters, hand-pumps, water heaters etc. will be chargeable to service tax.

As commonly understood, the activity of installation means the act of putting an equipment, machinery or plant into its place and making it ready for use. The activity of installation will start after erection which would refer to putting up civil structures. Commissioning of a plant would mean operational signal an installed plant/equipment/machinery. In this backdrop it is clarified that putting up a water tank, piping, electric wiring, in a residential premises, etc., would not be covered in the definition of taxable service and thus, would not be taxable. However, installing a booster pump, air-conditioner, water filter, water heater, etc., would be covered in the definition and be taxable, as all these things are machinery or equipment.

Notification No. 18/2003-Service Tax, dated 21-8-2003 has been issued which exempts commission or installation services provided by a commissioning or installation agency other than a commercial concern. Accordingly, the commissioning or installation services provided by an individual will be exempt from service tax.

Notification No. 19/2003-Service Tax, dated 21-8-2003 has been issued which provides that in case of a contract which involves the commissioning or installation service along with supply of plant, machinery or equipment, service tax will be payable only on 33% of the gross amount charged for commissioning or installation and supply of plant, machinery or equipment. It is optional for the assessee to avail of this Notification. It is emphasized under this Notification that the gross amount (33% of which is chargeable to service tax) shall include the value of the plant, machinery, equipment, parts and any other material sold by the service provider along with the commissioning or installation service. The benefit of this Notification can be availed for a contract only if the exemption under Notification No. 12/2003-Service Tax, dated 20-6-2003 is not availed for that contract.

  • Circular No. 80/10/2004-S.T., dated 17-9-2004 

Service tax was levied on commissioning and installation of plant, machinery and equipment w.e.f. 1-7-2003. The general practice is that ‘erection, commissioning and installation’ are contracted as a composite package. There have been a number of doubts and queries regarding the distinction between erection and commissioning/installation. Erection would refer to the civil works to installation/commissioning of a plant or machinery. In this year’s budget, the scope of service tax under installation and commissioning is being extended to include erection also. Erection involves civil works, which would otherwise fall under the category of construction service. However, in case of a composite contract for erection, commissioning and installation, the erection charges would be taxed as part of this category of service.

  • Relevant extracts of D.O.F. letter no. 334/1/2010-TRU, dated 26-2-2010

Exemption from service tax is being provided to services relating to ‘Erection, Commissioning or Installation of,—

  • Mechanized Food Grain Handling Systems etc.;
  • Equipment for setting up or substantial expansion of cold storage; and
  • Machinery/equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products.
  • 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, floodlights. 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 there for. 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 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 [section65(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

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 may be decided based on the clarifications contained in this Circular.

 

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