Works Contract, Road Construction and Service Tax : Principles Explained in a Recent Decision

Works Contract, Road Construction and Service Tax : Principles Explained

Introduction

In a recent decision the service tax issues related to works contract service were explained. Finance Act, 2007 was introduced by then UPA-coalition Government. Through Finance Act, 2007, S.10 (10BC) was added to the Income tax Act, 1961 as well which dealt with "compensation on account of disaster". 

S.135 of the Finance Act, 2007 amended the Finance Act, 1994. S.135 of Finance Act, 2007 amended S.65 of the Finance Act, 1994. S.65 (90a) was added which dealt with "renting of immovable property". S.65 (105) was amended and S. 65 (105) (zzzza) dealt with "execution of a works contract".

Road Construction inside the Complex & The Shift

In the case of M/s.N.K.K. Infrastructure & Developers v Commissioner of GST, Customs and Central Excise [2025] GCtR 789 (CESTAT) it was explained that the execution of "works contract service” was brought under the net of service tax by the Finance Act, 2007 w.e.f. 01.06.2007 under Section 65(105)(zzzza) of the Finance Act, 1994 which defines the taxable services as under:-

“Works Contract – to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. 

Explanation — For the purposes of this sub-clause, “works contract” means a contract wherein,— (i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and (ii) such contract is for the purposes of carrying out,— (a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or airconditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or (b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or (c) construction of a new residential complex or a part thereof; or (d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or (e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;”

The service tax regime w.e.f. 1.7.2012 shifted from selective taxation to comprehension taxation and, therefore, “WCS” became taxable as "service‟ without reference to the specific head "WCS‟. The expression "Works Contract‟ has been defined under Section 65B(54) of the Act. 

It was held that considering the provisions of Section 65B(54) defining “Works Contract”, it is clear that the construction of roads are not specifically excluded therein.  

The previous finding of Warsi Buildcon v. Principal Commissioner, Customs, CE&ST [2024] GCtR 3382 (CESTAT) might be useful to understand the controversy. 

The findings in Warsi Buildcon are as follows : 

"The Notification No. 25/2012-ST dated 20.06.2013 w.e.f. 01.07.2012 granted exemption on services, provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of road, bridge, tunnel, or terminal for road transportation for use by general public. By virtue of the said notification the exemption on payment of service tax in respect of services relating to the construction of roads was limited only in respect of those roads which were meant to be used by general public. In other words the utility of the roads was linked with general public. The very clause of the exemption notification when it uses the words road, bridge, tunnel or terminal for road transportation implies the common services to be used by the general public and cannot be restricted, which is constructed for development of any township or residential complexes by a builder/developer/coloniser for the utility of the occupants therein. The two has to be distinguished on account of the nature of utility, whether the same is meant for common public or for private use by the buyers of the builders. Also, the definition clause (q) of the notification defines ―general public‖ meaning the body of people at large sufficiently defined by some common quality of public or impersonal nature."

"CBEC had issued Master Circular D.O.F. No. 334/1/2012-TRU dated 16.03.2012 where it has been clarified that construction of roads for use by general public is exempt from service tax. Construction of roads which are not meant for general public use e.g. construction of roads in a factory, residential complex, etc would be taxable. This itself clarifies that the exemption in respect of construction of roads is not available where they are not meant for general public use".