In Pursuit of Knowledge

Works Contract under MVAT & Some intricate issues

N. R. Badheka,
Advocate & Notary

  1. The Indian Constitution is unique in that it contains an exhaustive enumeration and division of legislative powers of taxation between the Centre and the States. Therefore, taxing entries must be construed with clarity and precision so as to maintain such exclusivity, and a construction of a taxation entry which may lead to overlapping must be eschewed. If a taxing power is within a particular legislative field, it would follow that other fields in the legislative lists must be construed to exclude this field so that there is no possibility of legislative trespass.

  2.  Under the three Lists of Schedule VII to the Constitution of India a taxation entry in a legislative List may be with respect to an object or an event or may be with respect to both. Where the entry describes an object of tax, all taxable events pertaining to the object are within that field of legislation, unless the event is specifically provided for elsewhere under a different legislative head.

  3.  Where there is a possibility of legislative overlap, the issue is resolved in accordance with settled principles of construction of entries in the legislative Lists. The foremost of such principles is that the legislative entries should be liberally interpreted, that none of the items in the List is to be read in a narrow or restricted sense and that each general word should be held to extend to ancillary or subsidiary matters which can be fairly and reasonably be said to be comprehended in it.

  4. Whatever the terminology, because there can be no overlapping in the field of taxation, such a tax if specifically provided for under one legislative entry effectively narrows the fields of taxation available under other related entries.

  5. The above observations by the Apex Court in the case of Godfrey Philips – 139 STC 537—(Constitution Bench of S C ) are apt for our present study. Surprisingly the later judgment of BSNL ( 145 STC 91(SC)) does not even refer to this historic judgment.

  6. The State derives power to levy tax on sale and purchase of goods under Entry 54 lists II of VIIth schedule of Constitution of India. This power is subject to article 286, as also subject to sec. 3, 4 & 5 of C S T Act. The power to levy tax on interstate sale is with the Union Govt. This power is further hatched with restriction with regard to declared goods in forms 14 & 15 of CST Act.

  7. A contract of work; i.e., works contract would involve transfer of property and also element of service or work rendered. That is why it is called composite contract or indivisible contracts. Broadly speaking works contracts can be of two types                                           

  1. Works contracts for constructions, repair etc. of immovable property and
     

  2. Works Contract in relation to any movable property like repairs to vehicles, tailoring charges, printing contracts, AMC contracts etc.

    There can be many contracts which do not fall under any of the above mentioned category. There would be many more which would evolve with advancement of science but the principles of interpretation remains the same. Ofcourse till further amendments.

Introduction of VAT

  1. In the year 2002, many States prepared for VAT. By MVAT Act 2002, the State of Maharashtra intended to usher in VAT regime. However the Finance Minister had to postpone introduction of VAT all over as most of the States were not ready with provision of VAT Act much less with the administration of VAT Act. However as we all know majority of the States of India introduced VAT Audit w.e.f. 1-4-2005, few remaining States followed the suit. As of now U.P. one of the biggest States is not enforcing VAT.

    I need not go to the details about purpose of introducing VAT. I would rather go straight to the provisions.

Taxation of Works Contract under MVAT Act, 2002

  1. Under VAT regime all the States provided for levy of sales tax on composite works contracts; i.e., contracts involving supply of goods and labour/services in their local VAT – Sales Tax Acts.
    The Works Contract (Reenacted) Act, 1989 was repealed and Maharashtra Value Added Tax Act, 2002 has been introduced w.e.f. 1-4-2005 in which all the deemed sales as provided in article 366 (29A) have been inserted in the explanation to section 2(24). Sub-clause (ii) of clause (b) of explanation to sec. 2(24) of MVAT act provides for levy of tax on works contract. By Maharashtra Act XXXII of 2006 dt. 20-06-06 ‘works contract’ is defined to mean;

    “Works contract namely, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.”

    The purpose of this amendment is to apply the decision of K Raheja (141 STC 298 SC) to the works contracts in State of Maharashatra . I shall discuss this issue little later. First lets see the provisions relating to Works Contracts in the State of Maharashatra.

Under the MVAT Act, 2002 two methods are provided to tax the works contract

  1. I.  To pay the tax as per the provisions of MVAT Act , 2002 Rule 58
    II. Composition of Tax, under section 42 (3)

Composition Scheme for Works Contractors

  1. Section 42(3) of MVAT Act gives the option to a works contractor to either pay the composition of tax for entire turnover of sales effected by way of works contract or in respect of any portion of the turnover corresponding to individual works contract The selection and application of law relating to composition is qua a contract.
    The main features of the composition scheme for Works Contractors under MVAT are as follows;

  1. The application of this section is optional – A contractor can opt for composition qua entire turnover during a year or qua a particular contract/s in a year.

  2. No prior application or permission to opt for composition required. The option need not be disclosed in the invoice but to be exercised while filing return

  3. Composition amount for notified construction contracts is 5% of the total contract value (TCV) & 8% 0f TCV for other contracts.

  4. The only deduction allowed from TCV is amount payable towards sub-contract involving goods to registered sub-contractor

  5. The phrase “amount payable towards sub-contract involving goods” means the aggregate value of goods on which tax is paid and the quantum of said tax paid by the sub-contractor or the sub-contract value on which tax by the sub-contractor or the sub-contract value on which tax by way of composition is paid by sub-contractor as the case may be”

  6. The notification of construction contracts inter alia includes Buildings, Roads, Runways, Bridges, Railway over bridges, Dams, Tunnels, Canals, Barrages, Diversions, Rail tracks, Causeways, Subways, Spillways, Water supply schemes, Sewerage works, Drainage, Swimming pools, Water Purification plants and Jettys. It all includes any works contract incidental or ancillary to the contractors mentioned hereinabove, if such work contracts are awarded and executed before the completion of the said contracts. This notification is similar to the construction notification prior to VAT.

  7. The contractor can collect the composition amount of 5% / 8% separately. The setoff eligible for both the type of contracts is prescribed separately.

  8. The contractors are eligible for input tax credit for tax paid on the inputs after retention as prescribed.

  9. The employer, the person who gives contract can get setoff if the composition amount is charged separately by the contractor

  10. The contractor can issue Form C for Inter-state purchase of goods

  11. Composition provisions do not apply to inter-state works contract

  1. Levy as per provision of law means levy of tax on transfer of property involved in execution of Works Contract.

    Rule 58 of MVAT Act Rules, 2005 provides for determination of sale price and purchase price in respect of sale by transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract.

    Sub-rule (1) provides for deductions in case one opts for payment of Value Added Tax on the goods involved in the execution of a works contract as per provisions of the law. The deductions are in conformity with the guidelines laid down by 2nd Gannon Dunkerley’s case.

  1. labour and service charges for the execution of the works where the labour and service done in relation to the goods (is subsequent to the said transfer of property – deleted by 8-9-2006);

  2. amounts paid by way of price for sub-contract, if any, to sub-contractors;

  3. charges for planning, designing and architect’s fees;

  4. charges for obtaining on hire or otherwise, machinery and tools for the execution of works contract;

  5. cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of works contract;

  6. cost of establishment of the contractor to the extent to which it is relatable
    to supply of the said labour and services;

  7. other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property.

  8. Profit earned by the contractor to the extent is relatable to the supply of said labour and services.

  1. Proviso to sub-rule (1) enables the contractor who has not maintained proper accounts and empowers the commissioner to provide in lieu of the deductions as aforesaid, a Lump sum deduction as provided in the table hereunder in case the commissioner finds that the accounts maintained by the contractor are not sufficiently clear or intelligible: Mark the wide discretion given to the Commissioner of Sales Tax. This gives freedom to officers to reject books and allow only standard deduction as provided in the provisio.The standard deduction are as follows:
    Sr. Type of Works Contract Amount to be deducted from No. contract price (expressed as a percentage of the contract price)

    Sr.
    No.

    Type of Works Contract

    Amount to be deducted from contract price (expressed as a percentage of the contract price)
     

    1.

    Installation of Plant and Machinery

    Fifteen per cent

    2.

    Installation of air conditioners and air coolers

    Ten per cent

    3.

    Installation of elevators (lifts) and escalators

    Fifteen per cent

    4.

    Fixing of marble slabs, polished granite stones and tiles (other than mosaic tiles)

    Twenty five per cent

    5.

    Civil works like construction of buildings, bridges, roads, etc.

    Thirty per cent

    6.

    Construction of railway coaches on under carriage supplied by Railways

    Thirty per cent

    7.

    Ship and boat building including construction of barges, ferries, tugs, trawlers and dragger

    Twenty per cent

    8.

    Fixing of sanitary fittings for plumbing drainage and the like

    Fifteen per cent

    9.

    Painting and polishing

    Twenty per cent

    10.

    Construction of bodies of motor vehicles and construction of trucks.

    Twenty per cent 

    11.

    Laying of pipes

    Twenty per cent

    12.

    Tyre re-treading

    Forty per cent

    13.

    Dyeing and printing textiles

    Forty per cent

    14.

    Any other works contract

    Twenty five per cent

 13A) The percentage is to be applied after first deducting from the total contract price, the amounts paid way of price for the entire sub-contract to sub-contractors, if any.
The value of goods so arrived at under sub-rule (1) shall, for the purposes of levy of tax, be the sale price or, as the case may be, the purchase price relating to the transfer of property in goods (whether as goods or in some other from) involved in the execution of a works contract.

  1. The contractors who pay Value Added Tax as per rule 58 of MVAT rules, will get full setoff of tax paid on inputs as per rule 52(1)(a) and subject to many more restrictions laid down in Act and rules. The contractors opting for the composition tax will get setoff at 64% as per rule 53(4) and the retention will be 36%. In case of construction contracts retention is on purchase price of goods.


TDS provisions

  1. Many employers in Maharashtra are yet not aware of this tax is to be deducted from the amount payable to Works Contractors. This is in addition to the TDS under the Income-tax Act.
    The main features of TDS Provisions under MVAT Act are as follows;

  1. The provision applies only to employers who are notified as liable to deduct the tax from and out of amount payable by the employer to a dealer to whom Works Contract is awarded.

  2. The amount payable is to be calculated after deducting VAT and Service Tax if charged separately by the contractor.

  3. The TDS provision applies only where the amount or aggregate of the amount payable to a dealer by such employer is more than Rs. 5 lacs in any financial year.

  4. The notified employer includes, The Central Government, any State Government, All Industrial, Commercial or Trading undertakings, Company or Corporation of the Central Government or State Government, A Company registered under the Companies Act, 1956, A local authority, including a Municipal Corporation, Municipal Council etc., A Co-operative Society including Housing Society, A registered dealer under the Maharashtra Value Added Tax Act, 2002, An Insurance or Finance Corporation or Company; and any Bank including individual included in the Second Schedule to the Reserve Bank and any Scheduled Bank recognized by the Reserve Bank of India, Trusts, whether public or private.

  5. The uniform rate of TDS by all employers
        i) 2% if the contractor is registered dealer
        ii) 4% if the contractor is un registered dealer

  6. The Commissioner may require any class of employers to deduct tax or such amount of tax as may be specified from and out of the amount payable (excluding the amount, if any, separately charged as tax or service tax levied by the Government of India, by the contractor) by such employer to a dealer to whom a works contract has been awarded, towards execution of the said works contract:

  7. The quantum of such deduction shall not exceed the quantum of tax payable towards such works contract:

  8. No deduction shall be made from any payment made to any sub-contractor by a principal contractor where the principal contractor has assigned the execution of any works contract, in whole or in part, to the said sub-contractor:

  9. T D S provisions will not apply to interstate works contracts

  10. Treatment to advance payment is as follows: For the purposes of TDS, the advance payment shall be deemed to be the amount paid towards the execution of the works contract only when such advance payment is adjusted, in part or otherwise, against the total amount payable towards the works contract.

  11. Any amount or any sum deducted in accordance with the provisions of this section and paid to the State Government may be claimed as a payment of tax by the person making the said supply and credit for the payment may be claimed by the said person in the period in which the certificate for payment is furnished to him by the person deducting tax in accordance with the provisions of this section.

  12. Any employer deducting any sum in accordance with this section, shall pay in Form 40J within 21 days from the end of the month, the sum so deducted to the credit of the State Government. If the employer does not deduct or after deducting fails to pay the tax as required by this section, he shall he deemed to be defaulter and the amount will be treated as tax arrears.

Input Tax credit to Works Contractors (ITC)

  1. VAT ideally should mean full set off or credit of tax paid on inputs. However as is evident there are so many exclusion to this golden rule that it becomes difficult to find out on what amount dealer is eligible for set off. I will refer hereinbelow few of the restriction on set off in relation to works contract specially construction contracts:

  1. Rule 54(g) prohibited ITC on purchases effected by way of works contract where the contract is for erection of immoveable property. An employer receiving tax invoice for construction of immoveable property will not be able to claim ITC of tax paid on such purchases. It must be remembered just as sale includes works contract purchase also include purchase by way of works contract. This sub-section is substituted by notification dated
    8-9-2006. As per this new rule 54(g) purchases effected by the employer by way of works contract when the contract result in immoveable property will be disallowed except in case of plant and machinery. This is beneficiary amendment as per the previous provision as it existed up to 8-9-2006, Employer as well as contractors were denied ITC even on plant and machinery.

  2. Under Rule 54(h) of MVAT rules, purchase of building material which are not resold but are used in the activity of construction are not eligible for set off claim. Here again what is building material is always a question open to litigation.
    The new rule 54(h) substituted with effect from 8-9-2006, prohibits set off on the purchase of any goods by a dealer the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in erection of immoveable property other than plant and machinery. Thus this is also a beneficiary substitution of the earlier rule.

  3. Under rule 53(4) a works contractor opting for composition mode of payment of taxes is deprived of full set off of the composition amount. The composition amount itself is quite substantial, and on the top of it the set off is retained by 36% of the credit which he would have been otherwise eligible had he not opted for composition.
    From 8-9-2006 this rule is also amended where construction contractor opting for composition will be eligible for set off equal to a sum in excess of 4% of the purchase price on which set off is calculated. Thus the Government while charging 5% composition on sale side will retain 4% of the purchase price from the set off available. For the contractor other than construction contractor the retention continue to be at 36% as stated herein above. However the retention do not apply to the goods other than the goods used in execution works contract. The works contractor will continue to get ITC as per the provisions of law for the capital asset as also for the purchases effected while incurring expenses debited to profit and loss account.

  4. There are many ifs and buts even for the negligible set off which the works contractors are eligible. The calculation of ITC for the contractors who have opted for composition for part of the turnover is practically difficult.

  5. The ongoing contracts that is the contracts agreement for which are entered in to prior to 1-4-2005 and the execution for which has commenced prior to 1-4-2005, had up to 20-6-2006 option to either continue to pay tax for works contracts as per the old composition or as per the provisions existing prior to VAT regime. Such dealer also had option to pay as per the VAT provision and claim ITC for the input. The later option was obviously beneficiary as the dealer could claim set off –ITC which was hereto not available. However vide amendment dated
    20-6-2006 this option is withdrawn retrospectively and now it is compulsory for the on-going contractors to pay as per the law prevailing prior to 1-4-2005. This obviously means they will not be eligible for any set off.

  6. The works contractors other than the construction contractors are happy lot as they are eligible for full set off at par with normal seller or purchaser. Repair contracts, AMC contracts, printing contracts are few such examples. In addition to the set off on input the ITC is available for capital goods and also for purchases forming part of the expenses debited to profit and loss account, of course subject to the restriction under MVAT Rules.

Intricate issue of works contract under VAT regime

  1. It was expected that with VAT the dispute whether a transaction is sale or works contract will come to an end. But that is not the case, even under VAT the works contractor are treated differently than the normal sale/ purchase transaction; i.e., for levy of tax, for grant of set off, coupled with TDS burden. To find the exact value of the goods transferred in the execution of works contract still requires an expert skill.
    Take an example of a works contractor doing repair job as also pure labour job along with sale of certain parts. The goods purchased get mingled. To apportion the value of goods used in execution of works contract as also goods resold is the first task presuming there is no transfer of property, even incidental, in the labour job. After this there will be further bifurcation of goods used in works contract as per rate of tax. The safest method which is tested by time and accepted by the department is the ratio proportion method. Thus it may not be easy to determine taxable turnover of such works contract.

  2. Calculation of input tax credit is yet another complex feature of works contract taxation under MVAT Act. Ideally a seller whether works contractor or not must get full set off of the tax paid on inputs, but under MVAT rules this is not so. As the contractor is put at par with the normal seller limitation and prohibition of set off applicable to the normal sale will also apply to a works contractor.

  3. The construction contractors are further worried with the new tax burden which may arise on account of judicial pronouncements specially K Raheja Development Corporation 141 STC 298 (SC). The Commissioner of Sales Tax, State of Maharashtra has issued a circular No. 12T of 07, dated 7-2-2007, interalia stating that the decision of K. Raheja will apply to the proceedings under MVAT Act with effect from 20-6-2006 irrespective of fact whether an agreement was signed prior to 20-6-2006 or otherwise. The facts of the case before the Hon’ble Supreme Court were different than the one which we find normally between a buyer of the flat and the builder or the developer. The judgment of the K Raheja may be correct on the facts before Hon’ble Supreme Court. The cost of the land, the sale of the part of the land are normally not the way the flats are sold in the State of Maharashtra. In Maharashtra what is sold is flat or commercial premises and no amount is bifurcated towards cost of land and construction. In fact the cost of construction is not mentioned in the agreement to sell the flat. What is mentioned is the lump sum amount for the sale of flat description of which is given specifically by way of annexure to the agreement.
    Even as of now the definition of works contract under MVAT Act is not inclusive one. Need less to add the circular of the Commissioner will lead to further deliberation and litigation by the builders and developers at the cost of public at large. The buyer of the flat will be forced to make the payment of VAT as well as stamp duty. Here lies the crux of the matter. If a transaction is sale of immovable property it cannot be sale of goods for the purpose of local enactment. Please refer to the beginning of my paper which in my opinion answers the question.

  4. Various Supreme Court judgments have created lot of controversies resulting in loads of litigation. Even, the Supreme Court has different opinions as is evident from the following judgments:

  1. Rainbow Colour Laboratory, (118 STC 9 (SC))-DB

  2. Associated Cement Companies Ltd. vs. Commissioner of Customs, (124 STC, 59 (SC))-DB

  3. C.K. Jideesh (144 STC 322 (SC))-DB

  4. Godfrey Philips (139 STC 531(SC))-CB

  5. BSNL (145 STC 91 (SC))-LB

  6. Sunrise Associates ( 145 S TC 576(SC))-CB

  1. The Supreme Court in Rainbow Colour Laboratory’s case held ‘All that has happened in law after the Forty-sixth Amendment and the judgment of the Supreme Court in Builders’ Association of India vs. Union of India (1989) 73 STC 370 is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction: (i) contract for the sale of goods involved in the works contract, and (ii) supply of labour and service. This division of works contract under the amended law can be made only if the contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer of property takes place as an incident of a contract of service. The amendment has not empowered the State to indulge in microscopic division of contracts involving the value of materials used incidentally in such contracts of services.

  2. Whereas the Supreme Court in ACC’s case held “The Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the forty-sixth Amendment the State would now be empowered to levy sales tax on such material used in the contract. The conclusion arrived at in Rainbow Colour Laboratory case (2000) 118 STC 9 (SC); (2000) 2 SCC 385, in our opinion runs counter to the express provisions contained in article 366 (29A) as also of the Constitution Bench decision of this Court in Builders’ Association of India vs. Union of India (1989) 73 STC 370; (1989) 2 SCC 645’.

  3. Again the Supreme Court in the case of Jideesh observed that the observation in ACC’s case was obiterdicta and therefore reiterated the principles laid down in Rainbow’s case.

  4. Recently, again the Supreme Court in BSNL's case held that the observation in ACC’s case was not obiterdicta and confirmed the ratio laid down in ACC’s case. The case of BSNL (145 STC 91) and Godfrey Philips 139 STC 531, read together makes complete study of the legislative competence of the State to levy the tax, its limitation, prohibition and last but not list the scope of service tax on the service part of a contract.

  5. Though the case of BSNL was with reference to lease transactions. The three member bench of the Supreme Court in BSNL discussed the effect of 46th amendment.
    The important observations are as follows:

  1. The word “goods” has not been altered by the Forty-sixth Amendment: that ingredient of sale continues to have the same definition.
     

  2. The Forty-sixth Amendment does not provide in article 366(29A) any licence to assume that a transaction is a sale and then to look around for what could be the goods. Nor has it affected the dominant nature test propounded in Gannon Dunkerley’s case [1958] 9 STC 353 (SC) to be applied to a composite transaction not covered by article 366(29A).
     

  3. Transactions which are mutant sales are limited to the clauses in article 366(29A). All other transactions would have to qualify as sales within the meaning of the Sale of Goods Act, 1930, for the purpose of levy of sales tax.
     

  4. Of all the different kinds of composite transactions only three specific situations were brought within the fiction of deemed sale: a works contract, a hire-purchase contract and a catering contract. Of these three, the first and the third involve a kind of service and sale at the same time. Apart from these two cases where splitting of service and supply has been constitutionally permitted in clauses (b) and (f) of article 366(29A), there is no other service which has been permitted to be split.
     

  5. After the Forty-sixth Amendment, the sale elements of those contracts which are covered by the six sub-clauses of article 366(29A) of the Constitution are separable and may be subjected to sales tax by the States under entry 54 of List II of the Seventh Schedule and there is no question of the dominant nature test applying.

  6. The Apex Court held that what are the “goods” in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction.
     

  7. The 1st Gannon Dunkerley case survived the 46th Constitutional Amendment in two respects. First with regard to the definition of “sale” for the purposes of the Constitution in general and for the purposes of entry 54 of List II in particular except to the extent that the clauses in article 366(29A) operate.

  8. By introducing separate categories of “deemed sales”, the meaning of the word “goods” was not altered. Thus the definition of the composite elements of a sale such as intention of the parties, goods, delivery, etc., would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment does not give a licence, for example, to assume that a transaction is a sale and then to look around for what could be the goods. The word “goods” has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition.
     

  9. The second respect in which the 1st Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by article 366(29A).
     

  10. Unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale.
     

  11. The test therefore for composite contracts other than those mentioned in article 366(29A) continues to be—did the parties have in mind or intend separate right arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is “the substance of the contract”. Which for the want of a better phrase, was referred to as the dominant nature test. by the Apex Court.

  1. The VAT provisions in relation to calculation of turnover and taxable turnover of the Works Contract is not clear. Under rule 58 of MVAT rule the burden is cast on the claimant dealer to prove the deductions. If the dealer fails to prove the deduction to the satisfaction of the assessing authority wide desecration is given to the assessing authority to reject the books and take recourse under the proviso to the said rule. The proviso to the said rule prescribe standard deduction which are exactly adverse to the observation of the SC in second Gannon Dunkerly’s case. The Supreme Court has in 2nd Gannon Dunkerly’s case (88 STC 204 (SC) held that in cases where the contractor does not maintain proper accounts or the accounts maintained by him are not found worthy of credence it would be permissible for the State Legislature to prescribe a formula for determining the charges for labour and service by fixing a, particular percentage of the value of the works contract and to allow deduction of the amount thus determined from the value of the works contract for the purpose of determining the value of the goods involved in the execution of the works contract. The Supreme Court has further observed that it must be ensured that the amount deductible under the formula that is prescribed for deduction towards charges for labour and services does not differ appreciably form the expense for labour and services that would be incurred in normal circumstances in respect of that particular type of work contract. Since the expenses for labour and services would depend on the nature of the works contract and would not be same for all types of works contract, it would be permissible, indeed necessary to prescribe varying scales for deduction on account of cost of labour and services for various types of works contracts.
     

  2. The liability of the contractor and sub-contractors. If the sub-contractors pays the tax under MVAT on his portion of work he does not get benefit of TDS deducted by the employer from the amount payable to main contractor. Thus the contractor has to claim refund of TDS. We all know how difficult it is to claim refund from sales tax department. The liability of contractor or sub contractor being joint and several, difficulty may arise if the sub-contractor do not co-operate in giving details when the main contractor is being assessed.
     

  3. The inter-State works contracts:. What is an inter-State works contract is still a matter of dispute. The SC in second Gannon Dunkerly’s case laid down that there can be cases of inter-State works contract. Similarly there can be sale in course of import or sale in course of export for goods to be used in execution of works contract. Though there are well laid down principles for all types of claims the authority are slow in accepting such claim in relation to deem sale namely works contract. The apex Court has held that the issue whether or not deemed sale of Works Contract takes place in the course of Inter-state trade or commerce has to be decided by the principals laid down in section 3 of the CST Act, 1956 which section consists of clauses (a) and (b). Section 3(a) would be applicable if the movement of the goods occasions in a deemed sales of works contract if the same is the result of a covenant or a incident of the contract irrespective of the fact that the transfer of property will take place only at the time of incorporation of the same into the work.

    There should therefore be nexus between the Works Contract and the Inter-State movement of the goods and until and unless the movement of the goods from one state to another is a result of a covenant or an incident of the contract there would be no inter-State sale in Works Contract and the state would be competent to levy the tax where the contract is executed.
     

  4. Contract whether works contract or service contract: Much confusion prevails as to whether there can be element of service in a works contract? In my opinion it is possible to have the element to service in a works contract and the constitution permits the Centre to levy tax on the service part of the works contract.