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Annual Maintenance Contract | Value Added Tax | Taxes

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Querist: MEHO – HCP Air Systems (P) Ltd. Query 1: Presently client is paying service tax and VAT on Annual Maintenance Contract, assuming 30% of total amount being realized from customers towards materials and balance 70% of amount being realized from customers towards labour. Accordingly VAT is being paid on 30% of amount and service tax is being paid on 70% of amount. The query is whether VAT and service tax liability is being correctly discharged. Opinion: a) Applicability of VAT First let us
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  Querist: MEHO – HCP Air Systems (P) Ltd. Query 1: Presently client is paying service tax and VAT on Annual MaintenanceContract, assuming 30% of total amount being realized from customers towards materialsand balance 70% of amount being realized from customers towards labour. AccordinglyVAT is being paid on 30% of amount and service tax is being paid on 70% of amount.The query is whether VAT and service tax liability is being correctly discharged. Opinion:  a) Applicability of VAT First let us analyze whether liability of VAT is being correctly discharged. A compositecontract for supply of both labour and material is a works contract and liability of VATshould be discharged in accordance with provisions of works contract tax as applicableunder the West Bengal VAT Act, 2003.It was observed by the Hon’ble Supreme Court in the case of Vanguard Rolling Shutters v. CST  - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, that it is difficult to lay downany rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at pricesagreed and the work or service is incidental to the execution of contract, it will becontract for sale. On the other hand, where contract is primarily a contract of work andlabour and materials are supplied in execution of such contract, it is a works contract.As per Section 14 and Section 18 of the the West Bengal VAT Act, 2003, liability of VAT can be discharged in accordance with any of the following three alternatives,subject to the conditions of the each alternative:- 1 st Alternative  – If the contractor maintains proper accounts and accounts maintained byhim are found by the assessing authority to be worthy of credence, than he can dischargehis liability on the value of material supplied at the rate of tax applicable to the material. 2 nd Alternative - Where the works contractor does not maintain proper accounts, or theaccounts maintained by him are not found by the assessing authority to be worthy of credence, and the amount actually incurred towards charges for labour and other services,or profit relating to supply of labour and services, are not ascertainable, such charges for   labour and services, or such profit shall, be determined on the basis of such percentage of the value of the works contract as is prescribed in Rule 30 of the West Bengal VATRules, 2005, for different types of works contract.It has been prescribed in Rule 30 that for Annual Maintenance Contract, 20% deductiontowards labour charges for execution of works contract will be allowed from the fullvalue of contract. VAT at the rate of 4% will be payable on 15% of the value of contractand VAT at the rate of 12.5% will be payable on the balance 65% of the value of contract. 3 rd alternative  – A work contractor may at his option, pay tax at the compounded rate of two  percentum of the aggregate of the amount received or receivable by him, provided heis not engaged in–– (a) making sale as referred to in sub-clause (ii) of clause (g) of section 2 of the CentralSales Tax Act, 1956; or (b) making sale in the course of import of the goods into, or export of the goods out of,the territory of India within the meaning of section 5 of the Central Sales Tax Act, 1956;or (c) transferring goods otherwise than by way of sale for execution of works contractoutside the State,Provided further that such dealer shall not be entitled to issue tax invoice.The work contractor opting for compounding scheme will also not be allowed to availInput Tax credit. Conclusion: On the basis of analysis of above discussion of provisions relating to workscontract tax, it is advisable to make a financial evaluation of net tax outgo under all thethree alternatives and VAT should be paid on the basis of alternative having least taxoutgo. It should be kept in mind that to opt for the compounding scheme, it is essentialthat both purchase and sales of material to be used in works contract should take place inthe state of West Bengal.   b) Applicability of Service Tax In accordance with section 67 of the Finance Act, 1994, service tax is payable on thegross amount charged by the service provider for service provided or to be provided byhim. However in accordance with notification 12/2003- S.T. dated 20.6.2003, service taxwill not be payable on so much of the value of the taxable services, as is equal to thevalue of goods and materials sold by the service provider to the recipient of service,subject to condition that there is documentary proof specifically indicating the value of the said goods and materials.Service tax liability is being discharged by the client on the 70% of the value of contractassuming 30% of the value of contract towards supply of materials. However it appearsthat there is no documentary proof to establish the value of material being supplied in anindividual contract. Hence in our opinion, in the absence of any documentary proof toestablish the value of material being supplied in a contract, service tax liability should bedischarged on the full value of contract. Query 2: Liability of VAT on composite work contract for HVAC installation andwhether ‘C’ form can be supplied/ received for purchases / sales for works contract Provisions of works contract tax is applicable under the West Bengal VAT Act, 2003 incase of a composite contract for supply of labour and material.It was decided in the case of  State of Madras v. Voltas Ltd  . (1963) 14 STC 446 and 861(Mad HC) by the Hon’ble High Court that An air conditioner manufacturer mayundertake a ‘works contract’ for designing, fitting and commissioning of air conditioningequipment. Property in air conditioning equipment passes as an incidental to the workscontract. Here, there is no sale of ‘goods’. It is a ‘works contract’.As per Section 14 and Section 18 of the the West Bengal VAT Act, 2003, liability of VAT can be discharged in accordance with any of the following three alternatives,subject to the conditions of the each alternative:- 1 st Alternative  – If the contractor maintains proper accounts and accounts maintained byhim are found by the assessing authority to be worthy of credence, than he can dischargehis liability on the value of material supplied at the rate of tax applicable to the material.  2 nd Alternative - Where the works contractor does not maintain proper accounts, or theaccounts maintained by him are not found by the assessing authority to be worthy of credence, and the amount actually incurred towards charges for labour and other services,or profit relating to supply of labour and services, are not ascertainable, such charges for labour and services, or such profit shall, be determined on the basis of such percentage of the value of the works contract as is prescribed in Rule 30 of the West Bengal VATRules, 2005, for different types of works contract.It has been prescribed in Rule 30 that for a Contract for supply and installation of air conditioning equipment including deep freezers, cold storage plants, humidification plantand de-humidors, 15% deduction towards labour charges for execution of works contractwill be allowed from the full value of contract. VAT at the rate of 4% will be payable on5% of the value of contract and VAT at the rate of 12.5% will be payable on the balance80% of the value of contract. 3 rd alternative  – A work contractor may at his option, pay tax at the compounded rate of two  percentum of the aggregate of the amount received or receivable by him, provided heis not engaged in–– (a) making sale as referred to in sub-clause (ii) of clause (g) of section 2 of the CentralSales Tax Act, 1956; or (b) making sale in the course of import of the goods into, or export of the goods out of,the territory of India within the meaning of section 5 of the Central Sales Tax Act, 1956;or (c) transferring goods otherwise than by way of sale for execution of works contractoutside the State,Provided further that such dealer shall not be entitled to issue tax invoice.The work contractor opting for compounding scheme will also not be allowed to availInput Tax credit. Conclusion: On the basis of analysis of above discussion of provisions relating to workscontract tax, it is advisable to make a financial evaluation of net tax outgo under all thethree alternative and VAT should be paid on the basis of alternative having least tax
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