15 December 2018


Works Contract vs Composite Supplies under GST



Works contract is a term which has always found a special mention in every indirect tax legislation be it Service Tax, VAT, CST and now GST. The life would be simple if the term maintains the same meaning everywhere. But in reality that is not so. There are several questions that one needs to ascertain whether a particular work falls within the classification of works contract only after which one can cling on to any tax rate.

In GST to a great extent the life is simple as the works contracts have been deemed to be a service, but the moot question remains whether a particular job is works contract or not? To address the issues concerned let’s take a small case:-

ABC Pvt. Ltd. (herein referred to as contractors) received a contract from Government for supply and laying of paver blocks.

Blocks are manufactured at contractor’s own factories. Contractor dispatch the manufactured materialto site under a delivery challan. Contractor does not issue invoice as the property in goods is not transferred to client at the time of dispatch of manufactured material. The materials are stored at site and used as per the project requirements.

We now have to determine the taxability of this transaction under GST by addressing following concerns:-

  • Whether the transaction should be treated as two different supplies viz. - supply of paver blocks and laying of paver blocks or it should be treated as single supply of works contract service?
  • In question number 1, what if the state where the paver blocks are manufactured and where they are laid are different?
  • If it is to be treated as a single supply, whether it is to be treated as a Works Contract or a composite supply?


Let’s look at some of the relevant provisions and the related judicial Pronouncements

(i) Definitions and related analysis:-

Section 2(119) - “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

Analysis of definition:-

Works contract means a contract for – This is an exhaustive definition. Unlike VAT and service tax, we cannot simply include any transactionwith labour and material as works contract unless we fit it in the category of works as specified in the definition. Therefore, if the work of suppling and laying of blocks does not fit in the specified works then, the transaction cannot be treated as works contract.Specified works are discussed below:-

Building: Building is an act of construction.

Construction: Construction is the process of constructing a building or infrastructure.

Fabrication: To construct by combining or assembling diverse, typically standardized parts.

Completion: This is the end of the construction phase when the physical work is completed.

Erection: Putting up of a structure upright in position or posture

Installation: Putting something in a device that stays in one place that often involves building and different types of materials.

Fitting out: A term used to describe the process of making interior spaces suitable for occupation. It is often used in relation to office developments, where the base construction is completed by the developer

Improvement: The act or the process of improving.

Modification: The action of modifying something.

Repair: Restore something damaged, faulty, or worn to a good condition.

Maintenance: The process of preserving a condition or situation or the state of being preserved.

Renovation: The action of renovating a building

Alteration: The action or process of altering or being altered

Commissioning: The process of verifying, in new construction, all (or some, depending on scope) of the subsystems for mechanical (HVAC), plumbing, electrical, fire/life safety, building envelopes, interior systems (example laboratory units), co-generation, utility plants, sustainable systems, lighting, wastewater, controls, and building security to achieve the owner's project requirements as intended by the building owner and as designed by the building architects and engineers.

Of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract – Two aspects are to be kept in mind i.e.:-

  • The works should be related to any immovable property.
  • Transfer of property should be involved.

Section (30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

Analysis of definition:-

  • The definition is an exhaustive definition therefore only limited supplies matching the criteria specified in definition will be termed as composite supplies.
  • Criteria specified in definition to categorize any transaction as composite supply is:-
    • Transaction to include taxable supplies only.
    • Transaction should be a combination of goods or services or any other combination of more than one supply.
    • Goods or services to be naturally bundled. For example: - Snacks served in a Flight is natural bundling however, free snacks with a soft drink is not natural bundling.
    • Goods or services or both should be supplied simultaneously,
    • Supply should be in the ordinary course of business. It means that supply of combination of goods and services should be a custom in industry and customer also expects to receive combination of such products. One supply from all such supplies should be a principal supply. Principal supply is that supply which is the intent of supply receiver and supply provider. In above example of food being served in an airline, transportation service through air is a principal supply.

(ii) Rates of tax on relevant supplies:-

  • Supply of paver blocks is taxed at the rate of 18 per cent.
  • Laying of paver blocks is taxed at the rate of 18 per cent.
  • Works contract service provided to Government, being non-commercial in nature, is eligible for lower rate of 12 per cent as per Notification No. 24/2017-Central Tax (Rate) New Delhi, the 21st September, 2017.
  • Rate of tax on composite supply is the tax rate specified for principal supply. In our case, principal supply is supply of paver blocks and hence the tax rate would be 18 per cent on the total work.

(iii). Before we discuss further, let’s look at some of the relevant case laws:

For classifying supply and laying of paver blocks as construction service:
In the case of Conwood Pre Fab Ltd. Vs Commissioner of Central Excise, Raigad as reported in 2014 (36) S.T.R. 1064 (Tri. - Mumbai), ‘The brief facts of the case are that the Jawaharlal Nehru Port Trust (JNPT) awarded contracts to M/s. Thakur Infraprojects Pvt. Ltd. and M/s. Man Projects Ltd. for commercial construction in the port area. These contractors further awarded a contract to the present appellant for laying paver blocks at JNPT. A show cause notice was issued to the appellant demanding Service Tax under business auxiliary service on the ground that the appellant is undertaking the assigned job on behalf of their clients through contractors. The adjudicating authority confirmed the demand and imposed penalties. The contention of the appellant is that the activity undertaken by the appellant covers under ‘commercial construction service’ rendered to a port and therefore is not taxable as per the provisions of Section 65(25b) of the Finance Act.

We find that admitted facts of the case are that the appellant had undertaken the job of laying of paver blocks at JNPT. In the impugned order in para 35, the adjudicating authority also held that prima facie there is force in the claim of the appellant as they claim to be carrying out the work of constructing the structure at port by using paver block only and that they are only laying paver blocks at roads, commercial premises etc. hence the service is classifiable under commercial or industrial construction.

We find that the activity undertaken by the appellant, i.e. laying of paver blocks, more appropriately comes under the scope of ‘commercial or industrial construction service’

In the case of CONWOOD PRE FAB LTD. Vs COMMR. OF C. EX. & SERVICE TAX, KOLHAPUR, as reported in 2016 (46) S.T.R. 425 (Tri. - Mumbai), in this case it was held that Stay/Dispensation of pre-deposit - Business Auxiliary Service - Sub-contracting of work of commercial construction in port area - Liability - There cannot be change in nature of service depending upon who received the service - Laying of paver by no stretch of imagination can be considered as “Business Auxiliary Service” - It would form part of “Commercial Construction Service” - Prima facie appellant not liable to discharge Service Tax liability on laying of paver block in port area - Pre-deposit of dues unconditionally waived - Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of the Finance Act, 1994. [paras 2, 5]

In the case of ABIDEEP INTERLOCK PAVERS PVT. LTD. Vs COMMR. OF C. EX., MANGALORE as reported in 2009 (15) S.T.R. 243 (Tri. - Bang.), in this case it was held that the appellant is required to pre-deposit Service Tax of Rs.2,09,030/- and Education Cess of Rs.4,181/- and also penalties of (i) Rs.100/- per day under Section 76; and (ii) Rs.500/- under Section 77 of the Finance Act. The appellants were carrying on the activity of Civil Construction inasmuch as they were laying of interlock pavers in the campus, for internal roads and approach roads to the compound and buildings. They were brought under the category of ‘Commercial or Industrial Construction Services’.

For deciding whether a supply is to be treated as a supply of immovable property or movable property:-

In the case of "Municipal Corporation of Greater Bombay and others Vs. Indian Oil Corporation Ltd., (1991 Supp (2) Supreme Court Cases 18", the issue which fell for consideration before the Supreme Court was as to whether storage tanks for petroleum products are "land" within the meaning of Section 3(r) or "buildings" as defined under Section 3(s) of the Bombay Municipal Corporation Act, 1988 and are exigible to property tax. It was held that the petroleum storage tanks are structures or things attached to the land and were exigible to the property tax. In paragraph 32 it was observed as under:-

"32. The tanks, though, are resting on earth on their own weight without being fixed with nuts and bolts, they have permanently been erected without being shifted from place to place. Permanency is the test. The chattel whether is movable to another place of use in the same position or liable to be dismantled and re-erected at the later place? If the answer is yes to the former it must be a moveable property and thereby it must be held that it is not attached to the earth. If the answer is yes to the latter it is attached to the earth. For instance a shop for sale of merchandise or eatables is a structure. The same could be sold by keeping in a push cart which has its mobility from place to place. Merely because it is stationed at a particular place and business was carried on, it cannot be said that push cart is a shop. The fact that no nuts and bolts were used to imbed the tank to the earth by itself is not conclusive. Though the witness stated that the tank is capable of being shifted, as a fact the tanks were never shifted from the places of erection. By scientific process, the tanks stand on their own weight on the earth at the place of erection as a permanent structure.

In the case of STATE OF ANDHRA PRADESH Versus BHARAT SANCHAR NIGAM LTD., as reported in 2012 (25) S.T.R. 321 (A.P.), The Telecommunication tower, of a height of around 90 meters and embedded either to the earth or to the roof top of a building, is under the control and possession of the passive service provider. The manner in which this 90 meter huge structure is fastened would necessitate its being excluded from the ambit of “goods”, and included within the category of “immovable property”. Transfer of the right to use “immovable property” would not fall within the ambit of Section 4(8) of the Act as “immovable property” is excluded from the definition of “goods” under Section 2(16) of the Act. Section 3(26) of the General Clauses Act, 1897 includes, within the definition of the term “immovable property”, things attached to the earth or permanently fastened to anything attached to the earth. Section 3 of the Transfer of Property Act gives the following meaning to the expression “attached to the earth”:

(a) rooted in the earth, as in the case of trees and shrubs;

(b) imbedded in the earth, as in the case of walls or buildings; or

(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached. The question whether a chattel is imbedded in the earth so as to become “immovable property” is to be decided on the principles of annexation to the land.
In case of BHARTI AIRTEL LTD. Versus COMMISSIONER OF CENTRAL EXCISE, PUNE-III as reported in 2014 (35) S.T.R. 865 (Bom.)Towers and PFB did not qualify as inputs under Rule 2(k) ibid, as they were not directly used for output services viz. telecommunication services; they were immovable, fixed to earth and not excisable; and they could not be regarded as essential inputs as antenna could be installed irrespective of tower or one tower could install number of antennas for different service providers and hence could not be regarded as integral part of output services; plea that these were required to provide output service on commercial scale, and hence satisfied functional utility test, rejected. [paras 21, 23, 25, 26, 31, 32]

In case of SERTA No. 20 of 2016 filed by Bharti Infratel Limited against the CESTAT Interim Order No. 41/2016, dated 3-3-2016 as reported in 2016 (42) S.T.R. 249 (Tri.-LB) (Tower Vision India Pvt. Ltd. v. Commissioner)The Appellate Tribunal in its impugned order had held that the telecommunication towers and pre-fabricated shelters used by infrastructure companies for providing business support services to telecom companies, were immovable structures and non-marketable and therefore, not excisable. The fact that the towers could be dismantled, moved and re-erected at another location by itself could not make them movable goods.

In case of ESSAR TELECOM INFRASTRUCTURE PVT. LTD. Versus UNION OF INDIA as reported in Excisability - Article permanently fastened to earth - It requires determination of both intention as well as factum of fastening to anything attached to earth, and this has to be ascertained from facts and circumstances of each case - Section 3 of Central Excise Act, 1944. [para 10]

In case of TATA MOTORS LTD. Versus COMMISSIONER OF CENTRAL EXCISE, KOLKATA-IV as reported in 2016 (46) S.T.R. 625 (Tri. - Kolkata), it was held thatLd. Special Counsel for Revenue submitted that the various items of iron and steel cannot be treated as capital goods in terms of the definition given under Rule 2(a) of the Cenvat Credit Rules, 2004. However, they may be “inputs” in terms of the then explanation to the definition of inputs under Rule 2(a) of the said rules, being the raw materials for making capital goods to be used in the factory of manufacturer. He submitted that these items are generally used for construction purposes and the ld. Commissioner in para 4.3 of the order has arrived on the conclusion that the said items were found to have been used for construction of flooring (mezzanine) structures in their workshop. They are embedded to earth and thus are in the nature of immovable property and are not excisable goods. In the instant case, the appellant is not eligible for Cenvat credit in terms of the judgment in the case of Vandana Global Ltd. v. C.C.E. reported in 2010 (253) E.L.T. 440 (Tribunal-LB).
In case of TOWER VISION INDIA PVT. LTD. Versus COMMISSIONER OF C. EX. (ADJ.), DELHI as reported in 2016 (42) S.T.R. 249 (Tri. - LB), it was held that Towers were immovable structures and ipso facto non-marketable and non-excisable - Fact that towers could be dismantled, moved and re-erected at another location by itself could not make them movable goods - On their dismantling into angles and channels, nuts and bolts, only “angles and channels” could be transported - Towers when embedded are considered as immovable property

In case of V.G. ENTERPRISES Versus COMMISSIONER OF CENTRAL EXCISE, RAIGAD as reported in 2015 (37) S.T.R. 744 (Tri. - Mumbai), it was held that, After hearing both sides, we notice that as far as the fabrication or erection of tank at site is concerned, the activity brings into existence an immovable property. Therefore, it cannot be said that the appellant has undertaken any manufacturing activity defined under Section 2(f) of the Central Excise Act, 1944. Therefore, the activity undertaken by the appellant would qualify as erection, commissioning and installation services.

(iv). Relevant provisions under the CGST Act, 2017



Section 54(3) -Subject to the provisions of sub-section (10), a registered person may claim refundof any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than–

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Rule 89(5) - In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula -

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC ÷Adjusted Total Turnover} - tax payable on such inverted rated supply of Goods

Explanation. - For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted

Total turnover” shall have the same meanings as assigned to them in sub-rule (4).

(B) "Net ITC" means input tax credit availed on inputs and input services during therelevant period;

(E) "Adjusted Total turnover" means the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period;


Findings and Conclusion:-

The most important issue to be addressed now is how to resolve the conflict of an activity being classified as a composite supply taxable at higher rate of 18 per cent as compared to a works contract service for Government where the rate is 12 per cent ?

Let us try to analyse the transaction more specifically.

Inter locking Paver blocks are erected on a concrete base. They are permanently fixed. We can say that paver blocks are replacement of concrete roads.

Features of paver blocks are as follows:-

  • The durability of Concrete pavers.
  • Flexibility to adjust to the environment.
  • Easy repair and maintenance of concrete pavers.
  • Aesthetics of Concrete pavers.

The core benefit of paver block road is that if we have to remove and re-erect them then, almost 60 per cent paver blocks can be reused after their removal and hence paver blocks provide longevity to roads.

One important fact to keep in mind for taxability of paver block is that they can be removed and re-erected with some damage.

Coming to our moot question, whether supply and laying of paver block is works contract?

To classify any transaction as works contract, we need to judge the transaction on three grounds viz.-

First ground - Whether the activity is specified in works contract definition?

To answer this question, we need to analyse activities specified in works contract definition which we have already done above.

Amongst them, most specific category related to our transaction is Construction activity.

To substantiate our classification, we can take reliance on judicial pronouncements related to earlier regime. Pronouncements on which we have placed reliance are mentioned above.

So we pass the first test.

Second ground - Whether the works are related to an immovable property?

Immovable property is not defined in the Act. Honorable courts have set two tests to classify any property as immovable property in earlier regime. Two tests are:-

i. Facts and Circumstances of each case

While determining the movability of any property we need to look into two aspects. First is that the immovable property should be fastened or fixed to earth. Fastening or fixing should be permanent in nature.

Paver blocks are fastened to earth permanently but their main feature is the capability of removal and re-erection. So here comes our second test.

ii. Intention of client

In part i above, we concluded that paver blocks are permanently fixed but they can be removed. So now we will consider the intention of client. Client’s intention can be determined by his priority for paver blocks over concrete road. The main reason is their longevity, durability and flexibility to re-use. The flexibility to re-use does not mean that blocks will be removed and re-erected frequently. They are meant to be permanently fixed to earth however when the need arise, client may remove them and re-erect. So primarily nobody will construct a road having an intention to remove it.

To substantiate our intention, there are judicial pronouncements where Courts held that notwithstanding the telecommunications towers possess capability of being dismantled, moved and re-erected, yet on the basis of intention, they ought to be classified as immovable property.

So we pass the intention test.

So on the basis of intention and facts of case, we can classify the activity of supply and laying of paver blocks as immovable in nature.

Qualifying on the second test, let us move on to third test.

Third ground - Transfer of property should be involved in execution of works contract.

This one is easy. Property in paver blocks stands transferred at the time of execution. On qualifying the transaction on all three grounds, we can conclude that activity of supply and laying of paver blocks is a works contract service in nature.

As mentioned earlier, rate of tax on works contract service for Government is 12 per cent however rate of tax on paver block is 18 per cent. So the department may be keen to classify supply and laying transaction as composite supplies.

If we recall the definition of composite supply discussed above, we come to a conclusion that composite supply is one which involves more than one taxable supply meaning thereby there has to be two different supplies. But we have already classified ourselves as a works contractor and there is only one service i.e. works contract service.So there is no combination of one or more supplies therefore we can avoid classifying our transaction as composite supplies.

On the basis of above understanding, let us answer issues raised above:-

1. Whether the transaction should be treated as two different supplies viz. - supply of paver blocks and laying of paver blocks or it should be treated as single supply of works contract service?

The transaction satisfies all the criteria required hence instead of treating the transaction separately as supply of paver blocks and laying thereof, the transaction can be classified as works contract service.

2. What if the state where the paver blocks are manufactured and where they are laid are different?

Assuming that the contractor has a branch in the State where works are supposed to be executed, the dispatch of paver blocks between factory and site will be treated as supply of goods and factory will charge IGST at the rate of 18 per cent to the receiving branch in other state and supply between receiving branch and client can be treated as works contract service and receiving branch will charge GST at the rate of 12 per cent.

In this scenario, the branch executing works contract service will have credit of IGST at the rate of 18 per cent on paver block and will be charging GST at the rate of 12 per cent to client. Hence, the receiving branch will have excess credit of 6 per cent on paver block due to inverted rate structure.

Excess credit on account of inverted rate structure can be claimed as refund under Section 54 read with Rule 89(5). However, there are certain drafting issues in Rule 89(5). The issue is that the Act allows refund of excess credit on supply of goods and services but the formula prescribed for calculating the amount of refund includes turnover of goods only. In this case, refund on account of goods will arise so we may not be concerned with this issue but the department, rigidly going through the rules, may restrict the amount of refund.

3. If it is to be treated as a single supply, whether it is to be treated as a Works Contract or a composite supply?

Works contracts on immovable property can be classified as works contract service and works contract on movable property will be classified as composite supplies.

In our case, transaction is qualified as works contract service hence, composite supply will not come into picture.

CA Sandesh Mundra and CA Pooja Jajwani,

Sandesh Mundra & Associates

The authors are currently engaged in doing several impact analysis assignments for the construction sector. They have also developed their own in house tool named GST Builder for doing multi state impact analysis. They have also authored a book titled “GST – Quick Connect with Construction Sector” available on www.consultconstruction.com

Besides, CA Sandesh Mundra as Chairman -GST Committee of the Builders’ Association of India, has been actively involved in giving several representations to the government on issues connected to the construction and infrastructure sector

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