Understanding Service-cum-Goods Contracts under VAT

• These contracts involve a combination of supply of goods and provision of services in a single agreement
  
• Common examples include construction, interior designing, fabrication, and installation contracts
  
• Under VAT law, only the value of goods transferred during execution of the contract is taxable
  
• The service component was taxable separately under Service Tax (pre-GST regime)
  
• Such contracts were governed by works contract provisions within state VAT Acts
  

Taxability and Deemed Sale Concept

• The transfer of property in goods involved in execution was considered a “deemed sale” under Article 366(29A) of the Constitution
  
• VAT was levied only on the value of goods involved, not on the entire contract amount
  
• Service elements like labor charges, supervision, and consulting were excluded from VAT scope
  
• Proper segregation of goods and service value in billing was critical to avoid dual taxation
  
• If not segregated, VAT authorities could apply valuation rules or percentages to determine taxable value
  

Valuation and Composition Schemes

• States prescribed methods for deducting labor and service charges to arrive at VAT liability
  
• Some states allowed a standard deduction method (e.g., 30% for labor) for ease of calculation
  
• Alternatively, dealers could opt for a composition scheme, paying VAT at a reduced rate on total turnover
  
• Composition rates typically ranged between 2% to 5%, without input tax credit
  
• Once opted, the composition scheme had to be applied consistently for the financial year
  

Documentation and Compliance Requirements

• Contracts had to clearly mention the scope of goods and services, item-wise values, and tax break-up
  
• Invoices must separately show the value of materials and applicable VAT
  
• Dealers had to maintain purchase records, stock registers, and tax payment proofs for goods used
  
• Works contractors had to file VAT returns disclosing contract-wise taxable turnover
  
• Input tax credit was allowed only for goods used in taxable portion, not for exempt or service parts
  

Audit and Legal Considerations

• VAT authorities scrutinized such contracts for undervaluation or misclassification of goods and services
  
• Improper segregation often led to tax demands, reassessment, and denial of credit
  
• Courts held that uniform contracts must be split between goods and service for proper taxation
  
• Legal disputes arose over whether VAT or Service Tax applied on certain composite elements
  
• Understanding state-specific rules helped businesses avoid overlap, double taxation, and litigation