GOVERNMENT OF ANDHRA PRADESH

COMMERCIAL TAXES DEPARTMENT

PROCEEDINGS OF THE

AUTHORITY FOR CLARIFICATION AND ADVANCE RULING

(Under Section 67 of APVAT Act, 2005)

Present: Sri G. Lakshmi Prasad, Addl.Commissioner(Policy)

Sri T. Ramesh Babu, Jt. Commissioner (Enft.)

Sri N. Ashok Reddy, Jt. Commissioner (Enft.)

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ADC Order No. 36 Dated 16th August, 2012.

A.R.Com/ 15/2012 Dated 16th August, 2012.

Ref:- CCT's.Ref.No: PMT/P&L/A.R.Com/2005, Dated. 13 April 2005.

ORDER:

I. M/s. Jai Prakash Associates Limited, Raj Bhavan Road, Somajiguda, Hyderabad (TIN 28420256228) have filed an application and sought clarification and advance ruling on the following items under Section 67 of APVAT Act, 2005 read with Rule 66(2)(i) of APVAT Rules, 2005 along with the application fee of Rs.1,000.

II. They sought clarification on the following:

Since the project will be extended over and above a financial year, it is not possible to ascertain the correct value of material at the time of incorporation, before the finalization of work and accounts. Since the value of material, consumables and other expenditure varies from here to here, the yearly account closure will not reflect the correct value of the material at the time of incorporation by the end of the project. In these circumstances, clarification is sought for the question, whether, they being dealers, submitting returns, are right in reporting the taxable turnover as per rule 17 (1) (d) and also the intention and meaning of the proviso II of the Rule 17 (1) (E).

III. The applicant submitted the following documents:

Write up on the issue.

IV. Mr. V. Ch. Narsi Reddy, Tax Consultant, Authorised Representative appeared for hearing and explained the case.

V. The issue has been examined with reference to the provisions of the APVAT Act, 2005 and the Rules.

VI. The applicant stated that the work agreement was executed with Govt. of A.P. for execution of two tunnels (single agreement) i.e., one for four Kms and one for 44 Kms. The four km tunnel is internal tunnel at Dindi in Devarkonda Mandal. The second tunnel is from Srisailam to Dindi near about 44 Kms. The tunnel's diametre is 10 meters throughout the 44 Kms. The project is under EPC i.e., survey, planning, designing and execution. The value of project is Rs. 1925 crores. The nature of work is to execute the tunnel and laying of cement concrete slabs, consisting of metal, steel and cement. The project has started in the year 2006 and expected to be completed before 2014 and hence sought for clarification.

The applicant is a works Contractor, undertaking the EPC project for Government of Andhra Pradesh which includes survey, planning, designing and execution of two tunnels besides laying of cement concrete slabs. The project is to be executed in a time span of 8 years. The applicant had not opted for composition under section 4(7)(b) of APVAT Act2005. Hence, the applicant is liable to tax under section 4(7)(a) of APVAT Act 2005, which reads as follows:

"Every dealer executing works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act"

The Rule 17(1) of APVAT Rules, 2005 deals with the Treatment of Works Contracts not covered by composition under the Act. The clause(d) of Rule17(1) reads as follows:

"The value of goods used in execution of work in the contract, declared by the contractor shall not be less than the purchase value and shall include seigniorage charges, blasting and braking charges, crusher charges, loading, transport and unloading charges, stacking and distribution charges, expenditure incurred in relation to hot mix plant and transport of hot mix to the site and distribution charges".

The Clause (e) of Rule 17(1) prescribes another method of arriving at the value of the goods at the time of incorporation by deducting certain expenses or amounts from the total consideration, received or receivable. These deductable amounts include labour charges, administrative expenses relatable to supply of labour, any similar expenses relatable to labour and profit relatable to supply of labour etc. It goes without saying that the administrative and similar expenses, relatable to material and profit, relatable to material are also required to be added to the cost price of material to arrive at the value of goods incorporated at the time of execution of works contract, if the method prescribed in Rule 17(1)(d) is adopted. The applicant claims that it is not possible to ascertain the correct value of the material at the time of incorporation before the finalization of accounts and that the yearly account closure will not reflect the correct value of the material at the time of incorporation except by the end of the project. In this regard, the Rule 31(3) of APVAT Rules, 2005 mandates that the works contractors, not opting to pay tax by way of composition, should keep the records, mentioned therein, showing all relevant details such as labour charges, administrative expenses relatable to supply of labour, any similar expenses, relatable to labour and profit, relatable to supply of labour etc. If the works contractors had the difficulty in maintaining records showing these details, they could have opted for composition, which they did not do.

The Central Government in exercise of powers under section 211(3C) of the Companies Act, 1956 notified the companies (Accounting Standards) Rules, 2006 in the official Gazette. The Rules provide for the Accounting standards 1 to 7 and 9 to 29, recommended by the Institute of Chartered Accountants of India shall be the Accounting standards for this purpose. The notified Accounting standards are mandatory for all companies. Accounting Standard AS-7 deals with the Construction Contracts. Accounting for long term construction contracts involves question as to when revenue should be recognized and how to measure the revenue in the books of accounts. At present, as per the revised standard AS-7, percentage of completion method on year to year basis is the only method to be adopted in contracts extending over more than a year to arrive at the Revenue. As per these standards, the companies are required to maintain records showing all types of costs and expenses. Accounting Standard AS-22 prescribes Accounting for Taxes on Income and profit every year. Under these circumstances, the applicants are not correct in stating that they cannot ascertain the correct value of material at the time of incorporation until the end of the project.

The Clause (d) of Rule 17(1), as already mentioned above, says that the value of goods used in execution of work in the contract, declared by the contractor shall not be less than the purchase value and shall include seignior age charges, blasting and braking charges, crusher charges, loading, transport and unloading charges, stacking and distribution charges, expenditure incurred in relation to hot mix plant and transport of hot mix to the site and distribution charges. This clause is in the nature of clarification on certain expenses, which are necessarily to be added to the cost price of the material purchased, but this clause does not indicate that only these charges are to be added and nothing else. Certain amounts, viz., administrative expenses, profit etc., related to material are invariably required to be added to the purchase price of material as mandated by the charging section 4(7)(a) of APVAT Act2005.

The second proviso to clause (e) of Rule17(1) says "subject to the filing of returns and payment of tax as per clause (d), the VAT dealer shall pay the balance amount of tax arrived at by following this clause at the time of finalization of accounts relating to the particular work. Such additional taxable turnover and taxes payable shall be declared in the return for the month in which accounts are finalized."

In this proviso, the term, "finalization of accounts relating to the particular work", shall be understood with reference to a particular financial year but not at the end of the project after several years, since the Works Contractors are required to finalize their accounts every year for each work and report Revenue, profit etc., as per the Accounting Standards, prescribed by Companies Rules discussed supra, to the Income Tax Department. The meaning of the proviso is that if the dealer files returns adopting the method of additions to purchase price of material as prescribed in Rule 17(1) (d), the dealer has to report the correct taxable turnover and pay the balance tax, after the finalization of accounts at the end of the financial year.

Therefore, it is clarified that the element of profit, pertaining to a particular work, shall be arrived at every year at the time of finalization of accounts for such year and report the additional turnover, if any, in the month, in which the accounts are finalised and pay the differential tax, payable if any.

NOTE:- An appeal against these orders lies before the Hon'ble Sales Tax Appellate Tribunal, A.P Hyderabad Bench within 30 days from the date of receipt of this ruling.

Jt. Commissioner