Set off vis-à-vis gross Receipts


A Public Ltd. company started construction of Huge Housing Project in the island city of Mumbai and has given construction contract to about 5 contractors who in their turn has also given sub-contracts for executing a part of contract awarded

With all the sub-contractors, there is a special clause in the agreement that they shall not raise the Bills till the contracts are completed and can draw part of cost of material and even labour charges on account and till today none of the sub-contractors has completed and no Bills are raised, but all the sub-contractors have claimed input credit in their returns and their refund amounts have mounted. However, dept. does not want to sanction any refund because according to dept. there is no output tax and hence no input credit can be given. All the assessments are pending after re-opening by Form 317.

Now it has been suggested that sub-contractors should raise running bills of the part of work executed during a particular year and collect the tax on the same and after adjustment of set off, pay the balance.

The sub-contractors of course all sister concerns only, but different Pvt. Ltd. Companies are afraid whether they can adopt this method safely and the learned counsel is requested to advise.

1) So far as sub-contractors are concerned, whether this formula is a safe action, because if, they are to collect Tax only in final Bills, then they may lose input credit spread over for 5 years.

2) In case of main contractor as well as developer whether they can claim input credit on those tenements only where 1% composition scheme is not applicable.

3) For information it may be noted that all the assessments of main contractors and developer are pending in appeals at various form and they can put up additional ground during hearing of appeal.

4) Since the execution of contracts are likely to continue during G.S.T. era.

Kindly advise what shall be position under G.S.T. era.


It appears that the situation is arising due to effect of Rule 53(6) of the MVAT Rules. Rule 53(6) provides that where receipts from sale are less than 50% of gross receipts, the set off should be allowed on the purchases which are sold within six months from the date of purchase.

In the given query, there is execution of contract. In other words, there is transfer of property in execution of works contract. However, the billing is not done and hence receipts are not seen.

The department’s view that since there is no output liability the sub-contractor cannot get set off is not correct in the eyes of law. There is no such connection except as provided by Rule 53(6) discussed above.

In case of sub-contractor, though there is no receipts accounted in the accounts since there is transfer of property by incorporation of goods in the works, there is sale and if such sale is within six months from the date of purchase, set off is eligible. Probably the receipts as above may be 100% towards sale and therefore Rule 53(6) may not apply. The sub-contractor can substantiate above facts of use by certificate of architect or by other method. They can also give the data about date of purchases and use and accordingly can get entitled for set off.

Even if bills are not raised it cannot be said that there is no sale. As per law, there is sale and therefore claiming set off will be as per law. The department can also assess the liability on such sales in the assessment, though bills are not raised. As and when final bills are raised, the already assessed turnover should be deducted to avoid double taxation. Therefore, irrespective of bills raised or not, there is sale and department can assess accordingly also allowing set off.

For above purpose the sub-contractor can raise the running bill and can put the figures of sale also. Such running bills will only regularize the sales which are already effected as discussed above. Raising such bills for sales tax purpose is allowable, more particularly it is for discharge of tax.

In appeals you can take additional ground.

The main contractor cannot take set off from sub-contractor bills. They being principal and agent, there is no sale/purchase between main contractor and sub-contractor. Therefore set off will not be eligible. However, sub-contractor should issue Forms 407 and 408 to main contractor and main contractor should take deduction from its contract value. Thus the effect will be same.

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