Works Contract-Concepts under Service Tax Laws
Works Contract is defined in Section 65B(54), which read as follows:
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 part therof in relation to such property.
It is evident that following two conditions must be satisfied cumulatively in order to consider the service as works contract under this chapter.
(a) There should be transfer of property in goods involved in execution of the contract which is leviable to tax as sale of goods. The words "leviable to tax" refer to charging section of VAT Act and would cover a situation where the tax is leviable on the transfer of property but is exempt by notification. This is so because exemption by any notification does not mean that tax is not leviable.
(b) Such contract must be for-
- Fitting out
- Carrying out any other similar activity or a part thereof, of, or in relation to any movable or immovable property
The above words are not defined in whole Service Tax act, we have to consider the dictionary meaning of these words.
Works Contract Versus Contract of Sale
It was held in State of Andhra Pradesh v. Kone Elevators (India) Ltd. [2005 (181)
ELT 156 (SC) that:
- Depends on facts: There is no standard forumula by which one can disctinguish a "Contract of Sale" from a "Works Contract". The question is largely one of the fact depending upon the terms of the contract including the nature of obligations to be discharged therdunder and the surrounding circumstances.
- Intention of parties determines classification: If the intention is to transfer for a price a chattel in which the transfree had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by the artificial rules but from the intention of the parties to the contract.
- Test 1 - Contract for transfer of property v. Contract for work and labour: In a contract of sale the main object is the transfer of property and delivery of possession of the property, whereas the main object in a contract of work is not the transfer of property but it is one for work and labour.
- Test 2- Manner of transfer of property: Another test often to be applied to is, when and how the property of the dealer in such a transaction passes to the customer.
- Other relevant tests: The essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The pre-dominant object of the contract the circumstances of the case and the custom of the trade provides a guide in deciding whether a transaction is a sale or a works contract.
- No works contract if use of skill and labour is incidental: Where the use of labout and skill is incidental to sale, then, it will not amount to works contract.
An intresting case here for better understanding the last test. Supply and Installation of lift/escalator at customer's site is not works contract but is contract of sale. In this case it was held that:
- The customer was required to do the actual work at site for installation of lift and the entire onus of preparation and making ready of the site for installation of lift was on the customer.
- Thus the execution of the contract was divided into two parts, namely "the work" to be initially done in accordance with the specifications laid down by the assessee and "the supply" of lift by the assessee.
- "The work" part in contract was assigned to the customer and "the supply" part was assigned to the assessee.
- "The Supply" part included installation of lift.
- In view of the fact that the assessee undertook exclusive installation of the lifts manufactured and brought to the site in knocked-down state to be assembled by the assessee, it was clear that the transaction in question was a contract of sale and not a works contract.
- The assessee was in the business of manufacture and selling the lifts and elevators and had sold the lifts and elevators during the relevant period in the course of its business.