Questions and Answers

C. B. Thakar, Advocate


Q.1 Quantum of TDS

Proviso to section 31(1) (b) of MVAT Act, 2002 provides as under:

"Provided that, the quantum of such deduction shall not exceed the quantum of tax payable towards such works contract"

The difficulty arises as to what is tax payable towards the particular works contract. A contractor has not opted for 12.5% scheme, 8% scheme or even 5% and paying tax on all the commodities as applicable rate i.e. 4%, 5% or 12.5% less input credit and if tax payable is determined, then he may be liable to pay a very negligible amount not even 20% of TDS amount @ 2% and hence there is always refund.

Can we not argue that since the tax payable coming to hardly 0.5% of contract value, the TDS amount should be restricted to that extent ?

Answer :

The section 31(1)(b) of MVAT Act, 2002 is reproduced below for ready reference.

"31. Deduction of tax at source:-

(1) (b) (i) The Commissioner may by a like notification 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:

Provided that, the quantum of such deduction shall not exceed the quantum of tax payable towards such works contract:

Provided further that, 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:

Provided also that, no deduction as provided under this clause shall be made in respect of any sale or purchase to which section 8 applies."

As per the scheme, the normal rate of TDS is 2%, if the contractor is registered contractor and it is 4% if, the contractor is unregistered contractor.

By first proviso to section 31(1)(b)(i), it is provided that the quantum of TDS shall not exceed the quantum of tax payable on the said contract. Normally the tax is determined by passing assessment order. Therefore, till such time, it will be difficult to decide, what is the tax payable on the said contract? The TDS is deductible at the time of payment or at the time of giving credit in the books to the contractor. Therefore, at such initial stage, contractee cannot decide the quantum. However, if the TDS has remained to be deducted at the given time and contractor has discharged liability without such TDS effect then at subsequent stage the contractee can take a plea that since the contractor has discharged liability, he should not now be called upon to make the payment of TDS. The sales tax authorities can grant the said plea, after cross examination of the records of the contractee. In sum total, it appears that at the stage of deducting TDS i.e. at the time of payment or credit, it will be prematured to decide the quantum of tax on such contract and hence, normally to avoid future liability of non deduction of proper TDS, the contractee should deduct the
TDS at given rate of 2% or 4%, as the case may be.

Q.2 Set off to builder

The builders are eligible for 1% composition scheme under MVAT Act, 2002, which is pronounced by notification under section 42(3A) dated 9-7-2010. In the said notification, one of the conditions for availing 1% scheme is as under:

"The claimant dealer opting to pay composition under this scheme shall not be eligible to claim set off of taxes paid in respect of the purchases."

A builder is having two businesses, one construction and other, hotel. He has purchases for hotel business also. Similarly, even for construction activity, he has purchases like staff welfare and assets. Whether builder can get set off in relation to hotel activity, as well as other purchases? In other words, please explain the scope of above condition.

Answer :

Under the powers granted u/s 42(3A) the Government of Maharashtra has notified 1% composition scheme for builders. The notification dated 9-7-2010 contains 7 conditions, one of which is reproduced as above. As clear from the 1% composition scheme, it is restricted to the construction activity. The normal interpretation of law is that the notification will not travel beyond the scope of subject covered under it. Since, the notification is in relation to construction activity by no stretch of imagination it can be extended beyond construction activity. In other words, in my opinion, builder is entitled to set off in relation to hotel activity.

The other issue is about purchases debited to P & L A/c (which are not transferred in the execution of the works contract but consumed in house) and assets, which may be related to construction activity. The issue is whether set off can be claimed on such purchases.

In case of works contract, the tax is leviable on transfer of property in goods. Therefore, the composition scheme should be considered as in lieu of tax payable on the transfer of property in goods. The scope of notification should be restricted to that extent only. This position also further gets support from one more condition given at Sr. No. 4 of the notification, which is reproduced below.

"The claimant dealer shall not transfer the property in goods, procured from outside the State, using the declarations in Form ‘C’ under Central Sales Tax Act, 1956 in the contract for which the composition for tax payment is opted."

As per this condition ‘C’ form use is debarred in relation to purchases, which will be transferred in the contract. In other words, other purchases, which are not transferred like machinery or expenses purchases, can be purchased against ‘C’ form. This shows the intention of the issuing authority. The same position will apply in relation to earlier impugned condition. In other words, the builder can claim set off on expenses, as well as assets, etc., which are not transferred. It is better that the issuing authority would have used more clear language. However, the interpretation has to be made in light of purpose of the notification as discussed above and set off remain available.

Q.3 Inter-State works contract

A contractor has order for installation of window frames from his Gujarat customer. The contractor manufactures window frames as per specifications in his workshop at Pune and dispatches the same to the site in Gujarat. Sometime specifications are not clear and require manufacturing of window frames at the site itself. For this purpose contractor dispatches log of wood to the site, where window frames are manufactured and installed. The contractor has to effect purchases of certain incidental materials at the site itself, locally. Whether contractor is
liable under CST Act, 1956 or Local Act in Gujarat?

Answer :

After amendment in the definition of ‘sale’ in the CST Act, 1956 from 11-5-2002, the inter-state works contracts are liable to tax under CST Act, 1956. As held by Supreme Court in case of Builders Association of India (73 STC 370)(SC), the sale under works contract is at par with normal sale, once the service portion from the contract is notionally separated. As held by Supreme Court, all the conditions applicable to normal sale are also applicable to sales under works contract. Under such legal position, the nature of inter-State sale under works contract has to be decided as it is decided in relation to normal sale. In case of normal sale, if it is established that the movement of goods from one State to another State is due to pre-determined Sale, such sale will be in course of inter State sale. Under works contract, the sale is of the goods which are installed in the contract. In this case of installation of window frames, the sale under works contract is of window frames. Therefore, where the readymade windows are dispatched from workshop in Maharashtra to Gujarat, it will certainly fall in the category of inter-State sale, as the said movement is due to pre-agreed works contract sale. The CST will be payable in Maharashtra.

However, when the log of wood is dispatched, the position will be different. In such case, it can be said that only raw material is dispatched and the goods actually sold in contract i.e. window frames are coming into existence in Gujarat. Therefore, it will not be a case of dispatch of goods from Maharashtra, which are subject matter of sale. Under above circumstances, the dispatch of log of wood will be transfer to site and ‘F’ form will be required to be obtained from Gujarat. The tax on window frames manufactured and installed in Gujarat will be liable to tax in Gujarat.

The other materials purchased in Gujarat and used in contract will also amount to local sale under Works Contract in Gujarat and liability on the same will be required to be discharged in Gujarat.