Main Contractor – Sub Contractor, Who should pay Service Tax?

“Take a case where A Ltd would take up a project for Rs 1,000 Crores and outsource it entirely for Rs 750 Crores to a sub contractor, say B. Now Govt will get ST on Rs 750 Crores and not 1000 crores.” – well that seems to be the position.

There was a similar situation in the case of Larsen & Toubro Ltd before the High Court of Andhra Pradesh – 2006-TIOL-327-HC-HYD-VAT

To put it in simple terms, there are three parties here.

1. Employer who has entrusted a works contract to the main contractor

2. Main Contractor – in this case L&T

3. Sub contractors, to whom the main contractor has entrusted the work.

The question before the High Court was, “who should pay VAT?” – the Contractor or the sub contractor or both.

Whether in a transaction of entrustment of a works contract by the contractor to the sub-contractor, there is one taxable event under the VAT Act or two.

Revenue argued that there are two deemed sales – one from main contractor to contractee and the other from sub-contractor to the main contractor.

The High Court observed,

The sub-contractor is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the employer and therefore there can only be one sale.

To hold that there are two taxable events in such a transaction, enabling the State to levy and collect tax both from the sub-contractor and the contractor in our view would be violative of Article 14 also for the reason that wherever a contractor executes a works contract himself without employing the sub-contractor the deemed sale of goods involved in such execution of works contract would attract the tax only once and whenever the contractor employs a sub-contractor, the transfer of property in the same goods involved in the execution of such works contract attracts the tax twice over, which in our view is plainly irrational and violative of Article 14 of the Constitution of India.

We reported this case in November 2006 and in our analysis we mentioned, “Similar situations will crop up in Service Tax matters also where the contractors and sub contractors are providing the same service. Will the same logic apply to Service Tax?”

This case did not attract much attention in Service Tax.

Two years later the Supreme Court upheld the AP High Court’s judgement. We reported this case as 2008-TIOL-158-SC-VAT

Noting that “works contract” involves transfer of property and also element of service or work rendered, the Supreme Court held that even if there is no privity of contract between the contractee and the sub-contractor that would not do away the principle of transfer of property by the sub-contractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods.

Reporting the Supreme Court in August 2008, we again asked, “Now will this have any implications in Service Tax?” Again it did not attract much attention.

Service Tax litigation in Works Contract Service was just brewing.

In the IVRCL case – 2011-TIOL-1542-CESTAT-BANG the Counsel heavily relied on the Supreme Court Judgement, but the Tribunal did not make any comments.

In Bhayana Builders case – 2013-TIOL-1331-CESTAT-DEL-LB also, the Counsel relied on the Supreme Court Judgement – again, no comments from the Bench.

In the Ramky case – 2012-TIOL-613-CESTAT-BANG the Counsel made a strong plea thatthe transfer of property in goods used in the execution of such contracts was from the sub-contractors to the Government and not from the appellant to the Government and therefore the execution of such contracts would not be covered by the definition of “works contract”. The Tribunal did not accept this argument for two reasons:

1. this plea was not raised by the appellant in their reply to the show-cause notice or in their subsequent written submissions filed before the adjudicating authority. Therefore this plea cannot be entertained at this stage.

2. the definition of “works contract” does not stipulate that, where the contracts were executed by the contractor through a subcontractor, there should be transfer of property from the contractor directly to the contractee (service recipient). To our mind, it is enough if transfer of property in goods is involved in the execution of the contract and the same is exigible to sales tax as is the case under consideration.

This was totally against the Supreme Court Judgement, but strangely it appears that the Supreme Court Judgement was not brought to the notice of the Tribunal.

A Single Member Bench of the CESTAT in the case of Akruti Projects – 2014-TIOL-1925-CESTAT-MUM followed the judgement of the Supreme Court in a recent order and held that the sub-contractor was not liable to pay Service Tax.

And in the order delivered by the Circuit Bench of the CESTAT at Hyderabad on 02.02.2015, which we reported yesterday (2015-TIOL-342-CESTAT-HYD), the facts were:

The appellant-petitioner was the principal contractor and had entered into agreement with the Irrigation and Command Area Development (I & CAD) Department of Government of Andhra Pradesh for rendition of the works contract. The appellant entered into “Back to Back basis” agreements with sub-contractors. The total works were executed under the ‘back to back basis’ agreements entered into between the respective sub-contractors and the appellant-petitioner.

The Tribunal observed, “The Supreme Court clarified that in a construction works contract, the property used in the construction of a building/project passes from the builder to the owner of the land on which the building is constructed when the goods or materials used are incorporated in the building and that is so, even if there is no privity of contract between the contractee and the sub-contractor, since the deemed transfer of property in goods is based on the principle of accretion of property in goods. On the basis of the law declared by Hon’ble Supreme Court supra, it prima facie appears that no ‘works contract service’ was provided by the appellant to the Government of Andhra Pradesh since it was the sub-contractors who transferred the property in goods to the State Government by the process accretion of such goods into the property of State Government, during execution of works contract by the sub-contractors.”

Though, it is a Stay order, it is a path breaking one and has clearly and precisely imported into Service Tax, the ratio of the judgement of the Supreme Court in L&T which was a VAT case.

Now coming back to the issue mentioned in the beginning as agitated by my lawyer friend – “Take a case where A Ltd would take up a project for Rs. 1,000 Crores and outsource it entirely for Rs 750 Crores to a sub contractor, say B. Now Govt will get ST on Rs. 750 Crores and not 1000 crores.”

Yes Sir, that is what the Supreme Court said in relation to VAT and that is what the CESTAT said (though in a Stay Order) in relation to Service Tax – because the transfer of property took place between the sub-contractor and the contractee (employer) and there was only one deemed sale and so only one works contract service – for the amount of Rs. 750 crores.

It is not as if the Service Tax is lost to the Government on the remaining Rs. 250 crores; it may fall under some other service, but not works contract service.

A VAT decision eminently usable in Service Tax – GST in the pipeline!

Food in Trains – who should pay Service Tax?

THE Railways provide food in certain trains like Rajdhani Express. This contract is given to Indian Railway Catering and Tourism Corporation Ltd (IRCTC). The IRCTC in turn gives the contract to sub contractors who are caterers who actually supply the food. The payment is made to the caterer through IRCTC by the Railways. It is like this.

The caterer billed the IRCTC for the food supplied to passengers. IRCTC gave it to Railways. Railways paid the entire amount to IRCTC. IRCTC paid the entire amount to the caterer, who paid Service tax. IRCTC gets a commission of 15 Percent on which it paid Service Tax under BAS. IRCTC asked the CBEC for a clarification whether it was right and the Board replied that both IRCTC and the caterer are providing outdoor catering service.

While reporting this in DDT 494 – 20.11.2006, I mentioned the L&T judgement of the High Court – “as per the Board clarification, IRCTC is required to pay Service Tax for the catering in the trains, even though it does not actually provide even a glass of water. Then is the contractor who actually supplies the food also required to pay Service Tax? That too for the same taxable event?. Please recall the AP High Court judgement in L&T.”

FTP – Revision in Appendix 37 A of Handbook of Procedure

PRODUCT description and ITC HS codes of certain items mentioned in Appendix 37-A, Vishesh Krishi Gram Udyog Yojana (VKGUY) Table 2 of HBP v1 have been amended to bring more clarity. The benefits of VKGUY on exports made between 25th February 2014 and 16th February 2015, for these items shall be admissible on the basis of product description alone, irrespective of ITC (HS) Code mentioned in the shipping bill.

DGFT Public Notice No. 86 (RE-2013)/2009-2014,Dated: February 16, 2015

Customs – Exemption to Urea

GOVERNMENT has exempted Urea, falling under tariff item 3102 10 00when imported into India under the Urea Off-take Agreement (hereinafter referred to as UOTA) dated 29th May, 2002, as amended from time to time, between the Government of India and Oman-India Fertilizer Company S.A.O.C subject to the condition that the importer shall produce, prior to clearance of the said goods, before the Assistant Commissioner of Customs or Deputy Commissioner of Customs having jurisdiction, as the case may be, a certificate from an officer not below the rank of Under Secretary to the Government of India in the Department of Fertilizer to the effect that such declared value is in terms of agreed price under UOTA.

Notification No.04/2015-Cus, Dated: February 16, 2015

Voluntary Retirement of Group-A Officers – CBEC Instructions

IT is observed that of late, a number of notices given by the officers in Grade ‘A’ for seeking voluntary retirement/resignation from the service are sent to the Board at the fag end of the expiry of the prescribed notice period of three months and that too without providing the requisite documents, i.e., No Dues Certificate and Certificate regarding length of qualifying service rendered.

Board wants the notice for voluntary retirement/resignation must be forwarded to the Board within five working days of receipt of the same along with the requisite ‘No Dues Certificate’ and Certificate for length of ‘qualifying service’ rendered as on the date of the notice for VRS/resignation.

While forwarding the notice for VRS/resignation to the Board, a copy must simultaneously and invariably be endorsed to the Office of DG(Vigilance) and DS(Ad.v) with the request to send vigilance status in respect of the officer concerned direct to Ad.1I Section at the earliest, but not later than 10 days of receipt of the letter by DG(Vigilance)/Ad.v Section.

It is reiterated that no action will be taken in the Board on the notice for VRS/resignation received direct from the officer concerned without getting it routed through proper channel.

Board clarifies that the officer concerned who has given notice for VRS/resignation is not to be relieved of his duties till decision of the competent authority on the notice for VRS/resignation is conveyed to the Commissionerate by the Board/Ad. II Section. The officer concerned should be informed by the Chief Commissioner/Director General/Commissioner concerned that he continues on duty till the decision of the competent authority viz. Finance Minister is communicated by the Board.

Rule 56(3)(f) of the Fundamental Rules reads as

The appointing authority shall issue orders before the date of expiry of notice either accepting the voluntary retirement or not otherwise the Government servant shall be deemed to have been retired voluntarily from service at the end of the period of notice .

The Board’s instructions seem to be illegal as per the above provisions. If the Board does not get the application rejected within the three months notice period, the Government servant is deemed to have retired.

Incidentally, the Member (P&V) in this communication says –

“8. A list of cases for acceptance during Feb., 2005 and still pending orders may also be submitted.”

Since the Board is running ten years behind schedule, it should not ring any alarm bells for those officers who want to leave now!

CBEC Letter in F. No. A-38012/08/2015-Ad.II, Dated: February 13, 2015

When was Arvind Kejriwal’s resignation accepted?

DELHI Chief Minister Arvind Kejriwal was an Additional Commissioner in the Income Tax Department. He resigned with effect from 20.02.2006, but his resignation was not accepted for a long time. In the meantime even before his resignation was accepted, he plunged deep into Anna Hazare Movement and it was only on 20th December 2011 that his resignation was accepted with retrospective effect from 20th February 2006. Technically he was in service on 19th December 2011, if the CBEC instructions are to be followed.

But nothing could stop the AK 67.

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