MARCH 20, 2017

By Pankaj Goel, CA

HISTORICALLY whenever the words 'Works Contract' appears before an indirect professional, he or she is always reminded of the intense litigations at the highest courts, the amendments in Constitution of India and resulting amendments in States and Central sales tax laws. The concept of works contract was settled only after the interpretations were given by the Apex Court and incorporated in the underlying provisions.

One of the basic deterrents for levying sales tax on works contracts before the amendment in Constitution was whether works contracts are goods or services. Thus, when under the impending GST, both services are goods are taxed, presumably there should not be such problem.

This article attempts to highlight one such issue that may again become the bone of contention for another round of litigation unless taken care of by the Government.

Revised GST Law (RGL) defines the term works contract as follows:

(110) "works contract" means a contract wherein transfer of property in goods is involved in the execution of such contract and includes contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property

A bare perusal of the definition provides that works contract is divided into two parts:

1. It should be a contract wherein there should be transfer of property in goods;

2. It includes the list of contracts as mentioned in the definition.

It is also important to note Schedule II of the 'RGL' listing the transactions to be treated as goods or services. Entry 5 of the Schedule II defines certain transactions which will be treated as supply of services. Entry (f) is of interest to us, which reads as follows:

(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

The said entry provides that all works contract will be treated as supply of services irrespective of fact whether there is transfer of property in goods involved or not in execution of such a works contract.

The necessary conclusion, which this article is trying to highlight, comes out of a conjoint reading of definition of works contract and Entry 5(f) of the Schedule II. As per the definition of works contract, any contract involving transfer of property in goods will be works contract. The term 'contract' needs to be interpreted in accordance with Indian Contract Act, 1872 which inturn provides that any legally enforceable agreement is a contract. Thus, an imperative inference, in the light of existing definition of works contract, is that all supplies involving transfer of property in goods will be treated as works contract. Thus, even the sales simplicitor can be treated as works contract. Furthermore, by virtue of Schedule II, such sales simplicitor transactions are nothing but the provision of services.

In other words for the sales simplicitor, the provisions relating to supply of services will be applicable and not that relating to supply of goods. Accordingly, it is imperative for the Government to take note of this anomaly and amend the definition of works contract probably in line with that existing under service tax as follows:

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.

(The author is Partner, Apex Consultants and the views expressed are strictly personal)