Friday 17 July 2020

GST ON WORKS CONTRACTS AND REAL ESTATE TRANSACTIONS



 

DEFINITION - Section 2(119) of CGST ACT, 2017 provides as follows:

 

“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.

 

A careful analysis of the above definition is as below;

The definition includes the word “means”. The use of this word means, that if the contract is in relation to the 14 actions mentioned in the definition above in respect of any immovable property, then only it will be a works contract. If the actions are other than these 14, the contract will be out of the definition and will be a contract of composite supply under GST laws.

 

If the above 14 activities/actions are for an immovable property, only then the contract is works contract, and

The activity must involve transfer of property in goods also (whether as goods or in some other form) in the execution of the contract to make it a works contract. If there is no transfer of goods, the contract will be out of the definition of works contract.

 

The expression “in some other form” in the bracket is of utmost significance as by this expression the ordinary understanding of the term ‘goods’ has been enlarged by bringing within its fold goods in a form other than goods.

Goods in some other form would thus mean goods which have ceased to be chattels or movables or merchandise and become attached or embedded to earth. In other words, goods which have, by incorporation, become part of immoveable property are deemed as goods. So transfer of property as goods or goods which have lost its own form involved in the execution of a works contract will be covered in the definition.

 

In the Pre-GST regime, the contracts involving above actions in relation to both movable and immovable properties were treated as works contracts. Now in GST, If the contract is in relation to a movable property, then it will be a composite supply of goods or services depending upon the principal supply and will not be a works contract.

 

MEANING OF IMMOVABLE PROPERTY

 

“Immovable Property” has not been defined in GST Law and therefore its definition has to be considered as per other laws. Section 3(26) of the General clauses Act, 1987 defines immovable property as under:

“Immovable property shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

 

Attached to the earth means:

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

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

attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.

 

Section 3 of Transfer of Property Act, 1882 defines it as “Immovable Property does not include standing timber, growing crops or grass”.  Plant & Machinery fastened to earth may also be covered as immovable property based on the facts of each case. Hon’ble Supreme Court, in the matter of T.T G. Industries Limited Vs CCE, Raipur (2004) 167 ELT 501 (SC), held machinery as immovable property considering the weight and volume of the machine and the process involved in its erection and installation. The following factors can be helpful to ascertain whether plant and machinery is immovable property or not:

·         Degree of permanency of attachment to earth,

·         Intent of use of goods / property is essentially of immovable nature,

·         Cannot be detached from earth without causing substantial damage to it,

·         Identity of the goods is lost post removal.

 

If above conditions are not satisfied then plant and machinery will not be immovable property even if machinery is fixed to earth by foundation or structural support as per explanation to section 17 of CGST Act,2017 mentioned below:

Explanation – the expression “Plant & Machinery” means apparatus, equipment and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural support but excludes –

·         Land, building or any other civil structure;

·         Telecommunication towers; and

·         pipelines laid outside the factory premises.


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