Definition of Works Contract [Section 65B(54)]
“Works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
It is relevant to note that works contract is deemed to be a sale in terms of Article 366(29A) of the Constitution. Though deemed sale is not a service as per the definition of ‘Service’, the legislature has carefully drafted the Act to include service portion in the works contract under service tax net.This has been specifically declared as a service so as to remove the confusion on whether service tax is applicable when the said service is covered under the levy of VAT/ sales tax. Presently the law declared by the Larger Bench in the case of L & T Ltd. vs CST [2015-TIOL-527-CESTAT-DEL-LB], is that a works contract can be segregated into a contract of sale of goods and contract of provision of service even before 01.06.2007. This declared list entry has been incorporated to capture this position of l aw in simple terms.
Exemptions under Notification 25/2012-ST dated 20.06.2012
In simple terms, back to back works contract means the 100% sub-contracting of the original contract by the main contractor. In other words, the sub-contractor would provide the material and would execute the original contract. We will now see the taxability of back to back works contract.From the VAT perspective, though there is no direct contractual relationship between the sub-contractor and the contractee, the sub-contractor would be liable to pay VAT, by virtue of principle of accretion. It is to be noted that in the case of State of AP vs Larsen & Toubro Ltd. & Ors. [2008-TIOL-158-SC-VAT], Hon’ble Supreme Court held that when the work is sub-contracted, the material transfer in the said contract would be directly from the sub-contractor to the ultimate customer and it does not pass o n to the main contractor and from main contractor to the ultimate customer.From the Service Tax perspective, as discussed above, if the main contractor is providing works contract which is exempted, the sub-contractor would be eligible to exemption under entry 29(h).
In case of back to back contracts since the whole of the work is sub-contracted on back to back basis, the question arises as to, in the absence of transfer of property i n goods involved in the execution of such works contract, from the main contractor to contractee, whether the main contractor is eligible to be called as works contractor. In this regard, recently the Bangalore Larger Bench in the case of Lanco Infratech Ltd. vs CCE & ST [2015-TIOL-768-CESTAT-BANG-LB], held that in such scenario the main contractor cannot be considered as works contractor. This decision has basically overruled the decision in the case of Ramky Infrastructure Ltd. vs CST 2013 (29) STR 33 (Tri.-Bang), wherein it was held that it is sufficient to consider the main contractor as works contractor, since the contract between main contractor and contractee involves transfer of property.
However in the personal view of the paper writer the Lanco Infratech Ltd., decision cited above does not examine the difference in the wordings of the definition of ‘works contract’ as defined in Finance Act, 1994 and the principle of accretion adopted by Hon’ble Supreme Court in the case of Larsen & Toubro Ltd. cited above. The definition given in Service Tax only requires the transfer of property involved in the contract, which is subject matter of VAT/Sales Tax. It does not envisage that the liability should be on the service provider. However till any higher forum distinguishes the decision of Lanco Infratech Ltd., the law laid therein has to be followed.
It is to be noted that by virtue of Lanco decision, in back to back contracts, since the main contractor would not be called as a works contractor, the sub-contractor may not be eligible for the exemption under entry 29(h) of the Notification 25/2012-ST dated 20.06.2012 (assuming the main contract is exempted).